Student Debt Hinders Home Ownership
It's no surprise to most parents that college expenses are skyrocketing and student loan debt is reaching crisis proportions. According to the New York Fed, the collective outstanding balance on student loan debt was $1.31 trillion as of December 2016. That's a near doubling of student loan debt over the last decade.
A recently released Fed study shows the effect of collegiate debt on another financial rite of passage: home ownership. The study associates student loan debt with a lower rate of homeownership.
On its face, the correlation seems obvious — a person with student loan debt should have a more difficult time qualifying for a loan because of a higher debt-to-income ratio. However, the Fed study provides further insight into the relationship.
Debt Trumps Degree
The Fed study found that holding student loan debt is associated with lower rates of homeownership regardless of the degree type, and that Americans with significant student debt are far less likely to become homeowners at any age compared to those who hold little or no student debt. In other words, with respect to homeownership, excessive education debt has long-term ramifications that are not generally overcome by advanced degrees or by time.
Millennials are the poster children for this effect, thanks to a perfect storm of recession, a collapse in the housing market, poor job opportunities, and rising higher education costs. That correlates with other findings from recent Fed data, such as the growing delinquency rate. In the fourth quarter of 2016, student loan delinquencies reached 11.2%, topping all other forms of household debt.
Once delinquency is reached, the effects on a credit report are long lasting — forcing some millennials to wait even longer to restore their credit to a level suitable for mortgage applications, or give up on home ownership entirely.
It's important that millennials don't simply give up on their obligations and hope for outside help. Millennial Money Expert Stefanie O'Connell agrees, noting "The thing millennials really need to understand about student loan debt is that...paying it back is not a passive practice." There is long-term harm in failing to address student loan debt proactively.
Help Isn't Coming Soon
The Fed report suggests that their findings "highlight the importance of federal grant and loan programs." However, control of college costs is equally important. The National Bureau of Economic Research (NBER) found a 106% increase in the average cost of tuition from 1987 to 2010, and increases have continued on a similar upward path since then.
What incentive do colleges have to control costs if they know that you can simply borrow more money and/or assume more debt? As long as there is a wage premium for college graduates — which according to NBER has been flattening but still exists in significant form — colleges know that enough people will pay for an education assuming a suitable payback.
Unfortunately, payback values vary within fields. Adam Carroll, Founder and Chief Education Officer of National Financial Educators, suggests that the entire lending process be revised. "We need to make borrowing commensurate with what starting salaries are in that major," advises Carroll, pointing out that an education major and an engineer have the same student borrowing constraints.
In the near term, don't expect any help from the government. If you hold student loan debt already, it will be a long hard road back to fiscal health through tight budgeting. If you are just starting on your journey through higher education, it's up to you extract the necessary value from your college experience — and if you can't see how to do that at a particular school, regardless of how many of your friends are going there or how great the football team is, don't go there.
The New York Fed survey highlights the importance of simultaneously furthering your education while managing your debt load. As a young adult, it's hard to look at your college experience with the perspective of a return on investment (ROI), but it's important that you do so.
Excessive student debt hinders your ability to buy a home and deprives you of a time-honored method of accumulating wealth. Look over all possible opportunities for scholarships, work-study programs, and internships — anything to reduce the student debt load, especially if your intended field does not provide pay proportionate to educational requirements. Carroll adds, "College scholarships and the application for college scholarships is the single highest paying part-time job that a student can have." A one-hour essay that yields $500 in scholarship funds provides a pretty good ROI.
As a parent, you must guide your children toward the ROI approach while still letting them find their own way. Start by setting a good example. If you don't show fiscal responsibility and good budgeting and savings habits while your children were young, don’t expect them to be any different. Sending them off to college with a 529 plan, or a similar college savings program that partially covers costs, illustrates the point better than a thousand dinner-table lectures.
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