According to the New York Fed's latest Quarterly Report on Household Debt and Credit, America's student loan debt burden has reached a staggering $1.44 trillion as of September 2018. Has that burden kept younger Americans from buying homes?
A new Federal Reserve study suggests that educational debt isn't the primary reason for the homeownership decline, but it does play a role.
America's total homeownership percentage fell from 69% to 65% between 2005 and 2014, but homeownership for the age group 24-32 fell from 45% to 36% during the same period. Meanwhile, college debt per capita increased from $5,000 to $10,000 in the same time frame – a debt more likely to affect the age group in question. Are the two trends related?
Fed economists set up probability models to estimate the effect of increased debt on homeownership rates during the study period. According to the models, student loan debt was responsible for 1.8 percentage points out of the 8.8% total decline – just over 20% of the cause. Applying that finding to the overall population, the Fed estimates that over 400,000 potential homeowners were prevented from buying a home due to their student debt situation.
What caused the other 80% of the decline? The study doesn't address that question, but it does acknowledge that the time period covers the housing crisis, the subsequent recession, and the tightening of credit after the housing crash. All of these factors could disproportionately affect young Americans, who had less time in the workforce to establish a down payment and were more likely to have trouble finding a job because of the recession.
Other studies have verified that millennials continue to struggle with home buying goals, and that student loan debt plays a role. A 2018 Urban Institute study found that 8% fewer Americans between the ages of 25 and 34 owned homes compared to older generations at the same point in their lives.
Meager wage increases and increased housing costs are also causing millennials to delay homeownership. Housing price increases create a double whammy – homes are more difficult to afford, and rent increases make it difficult to save up down payment funds for a future home purchase.
How do you increase your chances of homeownership while dealing with student loan debt? You can't skimp on student loan payments, but you can investigate payment options that can make your educational debt more manageable. Check the Federal Student Aid Website to see if you qualify for income-based repayment plans or other alternatives to lower your monthly payment. If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.
Loan consolidation may be another option, if you qualify for better terms – but student loan rates are tough to beat compared to consolidation loans. You may also lose certain protections and options when you consolidate a student loan, so make sure you understand all tradeoffs before proceeding.
Once you've done whatever you can to reduce your debt, address your budget. You can't realistically purchase a home until you run regular monthly surpluses that you can apply toward a down payment (and use for monthly payments once your home is purchased).
As a young American, it may be harder for you to buy a home because of your student debt loan – but it's not impossible. With a realistic budget and the resolve to stick to it, you can eventually experience the dual satisfaction of homeownership and a zero balance on your student loan. If you need motivation, think about how wonderful that day that will be.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.