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Is Student Loan Debt Really an Obstacle to Homeownership?

Contrary to a long-running argument, student loan debt burden is not an impediment to achieving homeownership, according to a commentary authored by First American Deputy Chief Economist Odeta Kushi. [1]

Citing data from the recently-released 2019 Survey of Consumer Finances, Kushi observed that although average student debt increased from $12,600 in 1992 to $40,600 in 2019 inflation-adjusted dollars, the percentage of income set aside by a household head between the ages of 25 and 34 to repay student loan debt repayment declined from 7.4% in 2016 to 5.6% in 2019 while the median stayed at 4%.

While this occurred, Kushi continued, the average annual interest rate on a student loan has declined from nearly 8% in 1992 to slightly under 6% in 2019. As a result, Kushi stated, “Longer repayment terms and lower interest rates have resulted in increased ‘student loan-buying power’ and payment-to-income ratios that have remained steady over time.”

Kushi stressed that the debt that was absorbed in the pursuit of higher education has proved beneficial in the pursuit of homeownership.

“Higher educational attainment generally leads to higher household income, which translates into increased house-buying power,” Kushi said. “In 2019, the difference in house-buying power between a millennial with a high school degree (or some college/associate degree) and a millennial with a bachelor’s degree was approximately $225,000. This helps explain why the homeownership rate in 2019 among millennials with a bachelor’s degree was 6.8 percentage points higher than the homeownership rate among millennials with a high school degree.”

Kuhi determined that student loan-buying power “has increased sufficiently to keep the monthly payment burden from increasing,” which means student loan debt would only delay homebuying rather than disqualify people from becoming homeowners.

“So, with student loan debt burden moderated by stable payment-to-income ratios, and a significant return on investment from higher education accruing to the most educated generation yet, millennial demand for homeownership remains poised to continue to fuel a 'roaring 20s' of homeownership demand,” Kushi added.