New research from the Federal Reserve suggests that student loan debt may have prevented some people from owning a home.
Here’s what the Fed found.
Student Loan Debt Statistics
In November, U.S. Secretary of Education Betsy DeVos said student loan debt is now a ‘crisis.’
According to the most recent student loan debt statistics, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt. The average student in the Class of 2016 has $37,172 in student loan debt, and the average student in the Class of 2017 has almost $40,000 in student loan debt. Today, student loan debt is now the second highest consumer debt category – second only to mortgages and higher than credit card debt and auto loans. By 2023, 40% of student loan borrowers may default on their student loans.
Student Loan Debt and Buying A Home
The Fed found that 36% of adults age 24-32 owned a home in 2014, which is a 9 percentage point drop from 2005. This age group experienced a drop that was twice the rate of all other homeowners during the same period. During this time period, the level of outstanding student loan debt approximately doubled. While student loan debt was not the central reason reason for the decline, it did play a factor.
According to the Fed, “a $1,000 increase in student loan debt causes a 1 to 2 percentage point drop in the homeownership rate for student loan borrowers during their late 20s and early 30s.” The Fed estimates that about 20% of the drop in ownership is attributable to student loan debt. That means that about 400,000 young people could have owned a home in 2014 had it not been for the increase in student loan debt.
“This finding has implications well beyond homeownership, as credit scores impact consumers’ access to and cost of nearly all kinds of credit, including auto loans and credit cards,” the paper’s authors wrote. “While investing in postsecondary education continues to yield, on average, positive and substantial returns, burdensome student loan debt levels may be lessening these benefits.”
The Fed proposed several recommendations to address student loan debt, including:
- reduce the cost of tuition
- increase state government investment in public institutions
- ease the burden of student loan payments, such as through income-driven repayment.
5 Quick Tips To Buy A Home When You Have Student Loan Debt
If you want to maximize your chances to buy a home while you have student loan debt, focus on improving your credit score and debt profile. In addition to saving for a down payment, here are 5 tips to focus your efforts to buy a home:
- Get pre-approved for a mortgage
- Improve debt-to-income ratio
- Consolidate credit card debt to lower your interest payments
- Ensure all payments on time and don’t skip payments
- Refinance student loans to lower your interest payments