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Student Loan Debt and the Threat to American Homeownership

An unsettling new normal has emerged in the wake of the Great Recession. There is an evolving relationship between student loan debt and homeownership in America. And it's not a good one.
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An unsettling new normal has emerged in the wake of the Great Recession. There is an evolving relationship between student loan debt and homeownership in America. And it's not a good one.

The staggering amount of student loan debt carried by potential U.S. homebuyers is hampering and even derailing their individual ability to convert the higher incomes and employment prospects commonly associated with a college education into homeownership. The result has been a steep decline in the rate of homeownership in America, as well as a greater erosion of the many positive social benefits that it promotes.

The Federal Reserve Bank of New York estimates America's student loan debt to total $1.1 trillion in the first quarter of 2014, up from $241 billion in 2003. Consumer credit giant Experian tells us that more than 40 million Americans carry at least one student loan in 2014, up from 29 million in 2008. That's an increase of almost 40 percent in just six years.

When one takes into account the Consumer Financial Protection Bureau's recent assertion that fully three-quarters of the recent shortfall in new US household formation can be attributed to reductions among younger adults age 18 to 34, it's easy to see the role that untenable individual debt-to-income ratios -- fueled in no small part by runaway student loan debt levels -- play in derailing an already tenuous housing recovery. Just this week the Wall Street Journal tells us that student debt could reduce US home sales by as much as 8 percent in 2014 alone -- some 414,000 households 'lost' as result of student loan debt. The number of US households under 40 years old with monthly student loan payments between $500 and $750 has ballooned more than five-fold in just 9 years, from 296,000 in 2005, to an estimated 1.5 million in 2014.

Figures reported by the Federal Reserve tell us that an estimated $7.7 trillion in household wealth was lost to the Great Recession, $6 trillion of which can be attributed to rapidly evaporating real estate values. Under ordinary circumstances a sizable amount of this disappearing wealth would have undoubtedly been used to finance the costs of a college education by way of home equity lines of credit. Regardless of one's personal or philosophical opinion of such a financial strategy, the use of home equity to meet the fast-growing cost of higher education in today's marketplace is one that has been widely employed by millions of American families for decades.

The new normal of American life post-Great Recession has severely limited this once viable college financing option. The alternative has effectively shifted the collective debt burden of education costs heavily in favor of government-subsidized options, and away from private capital equity in the shape of formerly robust home equity values. What was once a financial decision undertaken by college-bound families with the financial backing of their home equity has now become a collective taxpayer burden made worse by the very government policies intended to "fix" the problem.

Of course, one can't help but acknowledge the skyrocketing cost of a college education in America -- a separate issue worthy of a considerable amount of thoughtful discussion in its own right. The rapidly expanding mountain of student loan debt carried by some is not only a troubling concern for the millions of Americans confronted with the decision of whether to borrow money to help finance the skyrocketing cost of higher education. It's also a looming challenge to homeownership and America's fledgling economic recovery as a whole.

It would be difficult at best to isolate and measure the exact degree to which overwhelming student loan debt contributed to the Great Recession. It is arguably at least as difficult to determine the true extent to which the Great Recession has directly contributed to the growing problem of student debt left in its wake. Yet, it's increasingly evident the degree to which student loan debt is hampering our economic recovery. Consider its stifling impact on homeownership in America.

It should be noted that this problem is not limited to Millennials and other would-be first-time homebuyers. A significant number of Baby Boomers and even their parents are also struggling under the weight of long-standing student loan debt. Homeowners today are actually retiring from their employment careers with student loan debt -- often times in a state of default. A recent study published by the Government Accountability Office finds that the percentage of U.S. households headed by individuals aged 65 to 74 with student loan debt, while statistically low at 4 percent, has quadrupled in recent years. The aggregate dollar amount of federal student loan debt owed by this same group has literally mushroomed, climbing from $2.8 billion in 2005, to $18.2 billion in 2013 - an increase of 650 percent.

This is not an opinion questioning the merits of the various forms of low-interest borrowing that help literally millions of Americans pursue the education necessary to earn the sort of income that could someday make them a middle class homeowner. It should be stated unequivocally that federally subsidized student loans are a good thing. Federal student loans have long represented an invaluable tool in helping scores of Americans afford the sort of educational opportunities that invariably lead to higher average employment incomes. These higher employment incomes in turn help today's new hires becomes tomorrow's first-time homebuyers. Homebuyers, in turn, form strong communities with healthy tax bases that yield strong, job-creating economic activity.

These same first-time homebuyers are major contributors to a residential housing marketplace that contributes fully one-fifth of America's annual gross domestic product. In many ways, as the first-time homebuyer goes, so goes America's housing marketplace. And the first-time homebuyer carrying student loans as an ongoing financial legacy of their efforts to help fuel a productive middle class future, is facing real financial trouble.

Analysts at the Federal Reserve Bank of New York offered this sobering assessment in May 2014 :

Prior to the most recent recession, homeownership rates were substantially higher for 30-year-olds with a history of student debt than for those without. This pre-recession pattern is typically explained by the fact that student debt holders have higher levels of education on average, and hence, higher income potential. Simply put, these more educated, often higher-earning, consumers were more likely to buy homes by the age of 30.

However, the recession brought a sudden reversal in this relationship. As house prices fell, homeownership rates declined for all types of borrowers, and declined most for those 30-year-olds with histories of student loan debt.

Did student borrowers regain their homeownership advantage in the course of the broader recovery? They did not. Surprisingly, student loan holders were still less likely to invest in houses than non-holders in 2013, despite the marked improvements in the aggregate housing market.

In short, the "homeownership advantage" historically enjoyed by borrowers with student loans is suddenly no more. Will it ever return? Well, that remains to be seen. Homeownership levels have steadily declined in recent years due to a number of post-recession challenges: an overall decrease in affordability and increasingly scarce access to residential mortgage loans chief among them.

The question of exactly how much of the more than $1.1 trillion in student loan debt being carried today stems from the $6 trillion disappearance in home equity, and has reappeared in the form of an unsecured government backed note is a valid one indeed. A predictable knee-jerk reaction to the statistical acknowledgment of this unsettling trend might call for dramatic restrictions and reductions of our federal student loan programs. Still others might reflexively call for more lenient eligibility standards regarding student loan debt as well as significant levels of loan forgiveness for various qualifying loans. One could certainly build a valid argument in support of both opposing positions, yet still miss the mark of addressing the fundamental issue as it relates to U.S. homeownership and the health of our national economy.

The relationship between student loan debt and homeownership is as complex as it is necessary. Federal student loan administrators, together with policymakers, leading national economists, consumer credit industry professionals, mortgage lenders, universities and borrower families alike must begin a serious dialogue around ways to reverse the trend of disqualifying debt-to-income ratios stemming from student loan debt, while continuing to satisfy the growing need for these proven ladders to successful homeownership.

Student loans have historically proven to be the financial assist needed to help a generation of Americans reasonably shoulder the growing cost of higher education. The result has been expanding levels of sustainable homeownership fueled by well-qualified first-time buyers with healthy incomes. When these same student loans become the primary reason many potential first-time homebuyers fail to qualify for homeownership, perhaps it's time for a candid and thoughtful discussion of the problem for the purpose of crafting a workable solution.

It seems that years of bad housing policy and a philosophical de-emphasis of homeownership has given rise to the unintended consequence of yet another unsecured runaway debt added to the ledger of the federal government, crippling scores of individual financial futures along the way.