Is the student debt and homeownership debate misguided?

July 25th, 2014

Sources say that student loan debt problems are no different now than they were in the 90s, indicating that claims about their effect on homeownership rates are inflated.

Economists in the housing industry have been keeping an eye on how much rising student debt has affected homeownership rates, especially among millennials - many of which are reaching the traditional age when consumers purchase homes.

While much of the media has focused on how college education expenses are becoming a detriment to the pace of home sales and younger Americans’ ability to switch from renting to owning, some experts are starting to question the extent to which homeownership is waning because of student debt. In some cases, economists are wondering whether there has truly been a noticeable change in recent years or if the data is simply being viewed incorrectly.

CoreLogic Chief Economist Mark Fleming recently published a blog post in which he recounted his experience at an Urban Institute event, where representatives from the Brookings Institution discussed their research on student debt problems in the U.S. He acknowledged that the issues are there. Total student debt has surpassed $1 trillion, income growth is stagnant and more consumers have outstanding education expenses. However, Fleming noted that this does not necessarily point to these problems as the source of declining homeownership rates.

Are millennials making the effort?
Student loan repayments as a percentage of income have remained relatively static since the 90s, and college graduates during that time found a way to become homeowners despite their debt. Additionally, studies show that individuals with degrees have higher incomes on average, suggesting that degree holders are able to afford their expenses.

“Which begs the question, if young people in the 1990s found a way to buy a home at the same time as having student loans, then why wouldn’t young people today, with the same relative burden, be able to do the same?” Fleming asked.

The one instance where student debt has been shown to have some effect on homeownership is when the debt holders do not obtain their degrees. However, it is not hard to understand this outcome, as these individuals have similar financial obligations as their classmates who finished school, but likely less income.

“The post-secondary educational system and financing policies for a college education need to carefully consider, and potentially attempt to prevent, the burden of college debt without the benefit of a degree,” Fleming said.

Has anything actually changed?
A recent report from CFPB Monitor posited that the problems with student debt are not new. What has changed, however, is how much attention is directed at the issues. Responding to the same Brookings Institution report, the source commented that the findings were inflated, as the only reason that education debt is at the forefront of the homeownership debate is because America’s more affluent individuals are starting to see the effects.

Typically, students from lower-income brackets are forced to supplement education grants with loans. Meanwhile, wealthier Americans, many of whom have wealthy parents, don’t have as many financial burdens after graduation, giving them an easier path to homeownership. As this group now faces hardship where it normally would thrive, policymakers and economists are more likely to see this as a problem that is just now spinning out of control, the source said.

Regardless of the cause for the debate, the Brookings Institution reported via its blog that at the moment, there is no clear evidence to determine whether there are any negative economic consequences that are a consequence of student debt. As a result of many variables that have not yet aligned – comparisons between the differently sized populations of borrowers and non-borrowers, for example – it is hard to draw any clear relationships. For this reason, the institution said reducing education debt will not necessarily solve the problems.