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On average, a person with student debt pays lenders about $350 a month. That is $350 that cannot be saved toward a down payment or contribute to monthly mortgage installments. This leads logically to the latest conventional wisdom that student loan debt is preventing young people from buying homes and in turn preventing the housing market and broader economy from achieving a full recovery.
This neatly packaged narrative has been promoted by leading economists, but a new report from the Brookings Institution questions whether the reality is quite so simple. "Is student debt really hampering the housing recovery?" writes Susan Dynarski, a senior fellow at Brookings and an economics professor at the University of Michigan.
Before turning to Dynarski's argument, a few facts for context:
- According to Zillow, an online real estate marketplace, the median age of a first time home buyer was 32.5 in the period from 2010-2013. That's up from a low of 29 in the late 1970s and down from a high of 33.5 in the early 2000s, when median home prices were higher.
- Americans currently hold a combined $1.3 trillion in student loan debt, according to the Federal Reserve. Brookings says the average borrower with an undergraduate degree has $30,000 worth of debt.
- The Pew Research Center holds that the Millennial generation--currently 18 to 35--are on track to be the most educated generation yet. As of 2014, 27% of Millennial women and 21% of men held bachelor's degrees.
Dynarski points to a 2013 Federal Reserve Bank of New York blog post as the origin of the commonly held notion that student debt is an albatross on the economy. In that post, Fed researchers used credit report data to compare home ownership rates of 30 year-olds with and without student loan debt.
Their analysis showed that home ownership by those with debt plunged from over 30% in 2008 to just over 20% by 2012, two percentage points below the rate among non-student debtors. (Typically student debt holders have higher ownership rates because more education tends to equal higher incomes.)
Dynarski notes: "Many read into this graph that student debt is dragging down the housing investments of the college-educated, making them worse off than those went to college and did not borrow." However, included in the no-student-debt-group are both people who paid for college without loans and people who never went to college. Dynarski argues that lumping together two dramatically different groups skews the data.
Lucky for her, researchers at the Federal Reserve's Board of Governors felt similarly and in 2014 replicated their New York colleagues' analysis, adding college attendance data. This addition made it possible to separate individuals without student debt into groups of with and without college education. It turns out people with a debt-free degree (or some debt free college) are 13% more likely to own a home than people who did not attend college.
Meanwhile, comparing college educated 30 year-olds with and without debt showed a nearly identical decline in 2008. And when the data is pulled by age rather than year shows that by 30 the difference in ownership between those groups is statistically insignificant. The Fed researchers concluded in their analysis: "Taken together, our results suggest that for those with college education student loan debt more likely affects the timing of home ownership than people's eventual attainment of it."
In a report released last summer Goldman Sachs argued student debt only has a significant impact on home ownership when the borrower has more than $50,000 in debt or is making payments that exceed 5% of their income.
Dynarski is blunt about her takeaway from all this. She points out that the $4,200 a year paid by a typical undergraduate borrower pales in comparison to "the difference in earnings between those with and without a college education." Men with bachelors degrees earn $35,000 more than those without a degree, for women the gap is $25,000. She writes: "What divides the haves and have-nots is not student debt. It’s having a college education."
