It used to be that having student loan debt made a person more likely to buy a house, but that decades-long pattern has broken. New data from the Federal Reserve Bank of New York (FRBNY) shows student loan borrowers are less and less likely to take out mortgages.
In 2013, 27- to 30-year-olds with student loan debt were less likely to have a mortgage than their peers who don’t owe school debt for the second year in a row, the FRBNY researchers report. People in that age range have been less and less likely to buy homes since the financial crisis, but until 2011 the traditional link between higher education and earlier homeownership had remained intact. What had seemed like a one-year blip in the data in 2012 now appears to be a persistent problem. The report notes that the declining relationship between education debt and homeownership is surprising given the improving housing market both in terms of home prices and a rebound in overall mortgage lending.
This isn’t just a problem for students and graduates with high debt burdens and weak job prospects. It’s a problem for the entire economy.
The transition from rootless young adulthood to a stable long-term lifestyle in a private home — what economists call “household formation” — is a key part of the broader economic growth cycle. Household formation requires spending a lot of money on things, which is good for the people who make and sell those things. Weaken household formation and you weaken all those businesses, jeopardize all those jobs, and keep the economy crawling along in low gear. “The normal milestones of adulthood—moving out of the childhood home, buying a car, getting a mortgage—are coming later and later in life,” David Dayen wrote in The New Republic earlier this year. “Could the way we finance higher education in America be sucking the vitality out of the economy, digging an entire generation a hole from which they cannot escape?”
The FRBNY numbers can’t answer that question. They pertain only to how likely it is for a person with student debt to invest in a home. But it doesn’t take much to jump from the correlation that the Fed researchers find to a causal link between student debt and weak household formation. By one set of calculations done last spring, the amount of money that Americans under 30 spend to repay their student loans each year — $43.5 billion — would be enough to buy over 155,000 brand new houses, almost 67 million iPhones, and about 489 million tickets to Disney World. Other economic evidence suggests that these same young people who should be buying homes under more normal circumstances are instead renting or simply living with their parents.
Americans owe more than a trillion dollars in student debt to the federal government and hundreds of billions more in higher-interest private loans. One in eight federal student loan borrowers is in default, and programs designed to shelter young people from default are still under-enrolled despite a big jump in public awareness of income-based repayment options. And that’s just for people who actually have an income. Job prospects are dim for new and recent graduates, but the pressure valve that’s built into most other forms of debt that become unaffordable — bankruptcy — does not work for student loans.