How Rising Student Debt Is Preventing Millennials from Becoming Homeowners

An important read for those of us
with student loan debt as well as those without. It is a
serious issue that our generation needs to figure out how to combat
in order to help the future from falling into this same
hole.

Graph: How Rising Student
Debt Is Preventing Millennials from Becoming Homeowners

Blog Post by: Benjamin
Landy
, on April 18, 2013 Image via ShutterstockImage via Shutterstock For policymakers worried about the
effect of America’s trillion-dollar student debt on the
economy, one of the biggest concerns is that borrowers are taking
out such large loans—over $26,000 on average—that it may be
years or even decades before today’s indebted youth can afford to
buy a new car or put a down payment on a house. That could spell
serious trouble for the housing market—a major driver of growth
that relies on a constant stream of new homeowners to bid up
property values and generate wealth—and the U.S. economy at large.
Unfortunately, a new analysis from the Federal Reserve
Bank of New York seems to confirm that rising student debt has
already begun to weigh on economic growth, as student borrowing
crowds out auto and mortgage lending and delinquency rates
rise. Here’s what’s happening. Traditionally, people with a
history of student debt have higher rates of homeownership than
people without student debt, since student debt holders have, on
average, a higher level of both education and income. That trend
held among thirty-year-olds (the median age for first-time
homeowners) until 2009, when the proportion of borrowers with
home-secured debt (a good proxy for homeownership) began to
plummet. By 2012, there were fewer homeowners with student loan
debt than those without, a major reversal from previous years and
clear evidence that, for many would-be homeowners, their student
loan burden now outweighs the educational benefits. The same trend is clear among borrowers with auto debt.
Before the recession, 25-year-old car owners with student loans
outnumbered those without loans by nearly 15 percent – once
again, a reflection of the fact that student debtors tend to be
better educated and have higher incomes. But in the aftermath of
the financial crisis, car ownership among Millennials with student
loans dropped dramatically, falling for the first time below those
without loans. So what changed in the last few years to cause borrowers with
student debt to abandon car purchases and home mortgages?
Economists Meta Brown and Sydnee Caldwell, the co-authors of the
Fed report, offer two explanations. First, a weak labor market
forced college graduates to lower their expectations for their
future incomes. Those with loan payments had to cut back even
further, lowering their consumption and debt levels in response to
the dismal economy. Second, banks tightened their lending standards
in the wake of the recession, making it particularly difficult for
people with outstanding debts to get access to additional credit.
At the same time, the number of borrowers behind on their student
loan payments increased substantially—from around 8
percent in 2010 to nearly 12 percent last quarter—even as other
consumers have found their economic footing. That’s a worse
repayment rate than credit cards. The result has been a startling
divergence in the credit scores of young people with and without
student loans, reflecting lenders’ growing suspicion of borrowers’
student debt levels since the recession. “Both these factors—lowered expectations of future earnings
and more limited access to credit—may have broad implications for
the ongoing recovery of the housing and vehicle markets, and of
U.S. consumer spending more generally,” Brown and Caldwell write.
“While highly skilled young workers have traditionally provided a
vital influx of new, affluent consumers to U.S. housing and auto
markets, unprecedented student debt may dampen their influence in
today’s marketplace.” Conclusions like that should trouble
Republicans as much as Democrats. If student loan delinquency grows
more common as the rest of the economy recovers, rising student
debt levels could presage a broader generational shift in
Millennials’ consumer behavior, in which later-in-life car
purchases and household formation—including delaying marriage and
having children—become the norm. Source: The Century Foundation

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