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Student Loans vs. First Mortgage

student loanBorrowers paying off a student loan early are 31 percent more likely to take out their first mortgage loan in the year following the payoff than in the year preceding it. This according to a study by the Bureau of Consumer Financial Protection (BCFP), that analyzed borrowers' use of credit as they approach and made their final student loan payments.

The study found patterns that highlighted the interconnected nature of borrowers’ finances, as repayment of one type of debt affected payments and borrowing on other types of debt. "This research can help us better predict the impacts of new policies or products on homeownership, credit card use, and the broader economy as a whole," BCFP said.

Looking at the months following the pay off of a typical 10-year student loan, the study found that borrowers paying off a student loan early also reduced their credit card balances and made large payments on their other student loans at the same time as well as taking out their first mortgage in the year following the payoff.

The study said that while this pattern showed a link between the timing of student loan payoffs and home purchases, the simultaneous reduction in credit card and other student loan balances suggested that increased wealth and income could "influence when borrowers pay off student loans, reduce credit card balances, and purchase homes."

Suggesting that when borrowers approached their final student loan payments, the study said that most preferred to pay off loans in full with a single large payment, which could coincide with the broader reduction in existing debt and was followed by increases in home purchases. But, for those borrowers who were "unable to, or chose not to, pay off their loans early," the reduction of other debts that followed their final payment suggested that their required monthly student loan payments constrained their ability to pay down those other debts.

"Our new findings suggest that the timing of many student loan payoffs may be determined by life events such as household formation or jumps in income or wealth, though transaction costs, rules of thumb, or inertia may also play a role," the BCFP study said.

Click here to read the full report.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.

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