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More on Student Debt and Declining Home Ownership

January 17, 2019

The relationship between student loan debt and home ownership is complex, according to a new report from the Federal Reserve. Previous reports from the Federal Reserve Bank of New York have found mixed evidence of the impact of student loan debt on the likelihood of whether the borrower will buy a home. While student loan payments may reduce the borrower's ability to save for a down payment or to qualify for a mortgage, investment in higher education tends to result in higher earnings and a smaller chance of unemployment, which means a better chance of being able to buy a home.

The new analysis from the Fed's headquarters -- the first in a series aimed at consumers -- attempts to isolate the negative effect of increased student loan burdens on home ownership from the potential positive effects of attending college. The home ownership rate in the U.S. has fallen by about four percentage points in the recession's wake, according to the Fed, with an even larger drop of nine points among heads of households who are 24 to 32 years old.

The new analysis finds that student loan debt does indeed decrease the odds of home ownership, with each $1,000 increase in debt causing a one- to two-percentage-point drop in the home-ownership rate of student loan borrowers during their late 20s and early 30s. Likewise, the Fed found that the aggregate increase in student loan debt from 2005 to 2014 reduced the national home-ownership rate among young adults by two percentage points. That means 20 percent of the overall decline in home ownership among young Americans can be attributed to student debt, the Fed found.

The analysis also said increased debt levels cause borrowers to be more likely to default on their student loans, which has a major adverse effect on credit scores and their ability to qualify for a mortgage.

"While investing in postsecondary education continues to yield, on average, positive and substantial returns, burdensome student loan debt levels may be lessening these benefits," the analysis concluded. "As policymakers evaluate ways to aid student borrowers, they may wish to consider policies that reduce the cost of tuition, such as greater state government investment in public institutions, and ease the burden of student loan payments, such as more expansive use of income-driven repayment."


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