In 2019, the total student loan debt in America is about $1.5 trillion. According to the New York Consumer Credit Panel, adults under 40 hold 65% of the total student loan debt. Although there has been much said about this figure, the income enhancement offered by a college degree still far outweighs the cost of the debt.
The average yearly cost for tuition, room and board for American out-of-state public universities topped $21,629 in 2018-2019, meaning most students will graduate with some form of student loan debt. For public universities, that will impact 66% of all graduates, but for private colleges that figure climbs to 75% of all graduates.
While rising levels of debt are often associated with greater income that keeps homeownership within reach, student debt is an exception, with some research finding a direct relationship between increased student loan debt and lower rates of homeownership. As time goes on and schools respond to declining public support by raising tuitions and fees, the impact on homeownership will grow. One study found that a 10% increase in student loan debt correlates with a 1.5% decrease in homeownership.
For federal student loans, the loan amount awarded is based on the financial capacity of their family, the “Expected Family Contribution,” a formula that anybody that has ever filled out a Federal Application for Student Financial Aid (FASFA) has puzzled over. Students from lower-income families may be at greater risk of missing out on homeownership due to even higher levels of student debt than their middle-income counterparts.
People of color are also more likely to need loans, with 77.7% of African Americans and 73.5% of Hispanics needing student loans for public four-year colleges. This disparity in borrowing further perpetuates the racial wealth gap, keeping borrowers who are people of color further away from building wealth, even when pursuing an education that is often billed as a ticket to the middle class.
Net worth could be a key indicator in the repayment of student loans. Whites have a net worth of $75,768, more than 3.5 times African Americans’ net worth of $19,190. Disparity compounds by 7% each year after the borrowers leave school, because African Americans have burdens with loan repayment and lower net worth, which in turn further widens the racial wealth gap.
Across the U.S., homeownership rates among many age groups fell after the Great Recession. For those Americans under 45 years of age, and especially those under 35, that drop has pushed their homeownership rates to historic lows. The combination of lower rates of employment during the years following the Great Recession, stagnant wages among many occupations and higher levels of student debt require graduates to service larger loan payments than in previous generations. Borrowers that default on their student loans have become more common as well.
Paying for an education and buying a home are both expensive goals that are complicated by a variety of other factors. The research on this topic doesn’t clearly show that student loan debt holds borrowers back from becoming homeowners as long as the borrowers earn a higher income as a result of obtaining a college degree. If the borrower fails to graduate or if they graduate from a school or program that doesn’t help them increase their income, the situation might be even worse. Or, the impact of student debt on homeownership may be simply a matter of perspective. As any person that has bought a home can attest, mortgage underwriters will count all debt against you when calculating how much you can borrow. The degree on your wall won’t change that.
The net effect of student lending is that millennials today have less income available to put towards the purchase of their first home, despite the enhancement to their income offered by a college education. For students from lower-income backgrounds and minority families, this effect is greater. By delaying homeownership for these students, the housing market suffers and we further entrench the racial wealth divide. As we start the run-up to the 2020 Presidential election, student debt and housing issues are taking center stage, with most candidates rolling out bold plans to reform both industries. How that focus translates into action on student debt and housing reform will determine the future wealth of millennials.
Zoe Paige was an intern and Jason Richardson is director of Research and Evaluation at NCRC.