A new report based on research from the Harvard Joint Center for Housing Studies indicates student loans bet has a potentially strong impact on consumers seeking to move from renting to buying a home. It also could delay their ability to build savings for a mortgage down payment.
Finally, young borrowers who are facing debt but didn’t finish their degree are looking at growing default and delinquency rates and challenges finding well-paying jobs, according to Irene Lew, a research assistant at the Harvard Joint Center for Housing Studies.
In Lew's report, "Student Loan Debt and the Housing Decisions of Young Households," she reviews the overall trend of how growing student loan debt is holding back Millennials from buying their first home.
"Following the Great Recession, the share of young renter households aged 20 to 39 with high student loan burdens (those allocating more than 14% of their monthly income toward student loan payments) nearly quadrupled, from 5% in 2007 to 19% in 2013,” Lew writes. "Cash savings and assets are generally lower among young renters with student loans compared to those without them. Homeownership rates have been consistently lower among young households with medium and high payment burdens relative to those with low burdens."
Homeownership rates among consumers aged 25 to 34, who typically make up just more than half of first-time homebuyers, have declined by more than 9 percentage points since 2004, according to Lew.
She notes that households without a degree make up more of the borrowers repaying their loans and who have a substantial amount of debt.
"Households who take on debt without completion of a two-or four-year college degree are likely to face both diminished earnings potential and higher risk of default, further impacting their ability to access credit for a home or other purchases,” she writes.
According to the 10th annual report on Student Debt and the Class of 2014 from the Institute for College Access and Success, the average student loan debt at graduation increased 56%, from $18,550 to $28,950 from 2004 to 2014.
Student loan default rates are also increasing which, according to Lew, reflects that an increasing amount of borrowers are struggling to pay off their loans.
"According to the U.S. Department of Education’s Federal Student Aid Data Center, 3.2 million borrowers are in default as of the third quarter of 2015, up by more than half (52%) from the same quarter two years ago," Lew reports. "Delinquency and default can harm the ability of young renters to access low-cost credit and qualify for a home purchase mortgage."
Lew also reports that among students that started repaying their loans in 2005, 15% defaulted on their loans and another 26% had at least one period where they were delinquent over the subsequent five years.
"Another 16% had loans in forbearance or deferment for economic hardship. Altogether, over half (57%) experienced a period where they did not make expected payments toward their outstanding student loan balances,” she notes.
The percentage of renter households with outstanding loan debt has increased dramatically, according to Lew.
“In 2013, 27% of all renter households and 40% of renter households aged 20-39 had outstanding student loan debt, up from just 16% and 25%, respectively, in 2001.”
Monthly student loan payments that burden young households are both limiting their overall money available each month and savings for the future – such as a down payment on a home or retirement, according to the report.
Lew concludes that options for young borrowers such as deferral or forbearance to delay payments or avoid delinquency are “time limited” and do not address the underlying problems of their low incomes and challenge finding low-paying jobs that contribute to the overall struggle of making student loan payments.
“This brief highlights the need for policymakers considering these and other implications of student loan payment burdens for outcomes beyond repayment and the avoidance of default,” Lew writes.