Student debt has prevented hundreds of thousands of millennials from buying homes, Fed says

Student debt protest Occupy

REUTERS/Andrew Burton

Occupy Wall Street demonstrators participate in a protest against the rising national student debt in Union Square, in New York, April 25, 2012.

  • Student debt has risen to $1.5 trillion, surpassing loans for cars and credit cards.
  • That has led to fewer young Americans buying homes, according to a new Federal Reserve report.
  • Loans have reduced individuals' ability to afford a down payment and to secure mortgages.

Mounting student debt has weighed on homeownership among young Americans, Federal Reserve economists said in a new report.

Homeownership among those ages 24 to 32 fell to 36% from 45% between 2005 and 2014, according to the report. While student loans were not the main factors influencing the housing market, the Fed said that about a fifth of the decline was directly linked to student loans. Pew Research defines a millennial as someone born between 1981 and 1996, meaning they are currently between the ages of 23 and 38.
About 400,000 borrowers would have owned a home if it weren't for climbing debt, researchers Alvaro Mezza, Daniel Ringo, and Kamila Sommer estimated, as high levels of student loans reduced individuals' ability to qualify for mortgages and to save for a down payment.

"We found that a $1,000 increase in student loan debt causes a 1 to 2 percentage point drop in the homeownership rate for student loan borrowers during their late 20s and early 30s," the researchers said.

Outstanding student-loan balances have more than doubled to $1.5 trillion over the past decade, outpacing levels of those for vehicles and credit cards.

A recent POLITICO/Harvard T.H. Chan School of Public Health poll found that the majority of Americans, both Republicans and Democrats, saw lessening student debt as an "extremely important" goal for Congress. Among a list of priorities, 79% listed cutting student debt as the most important.

"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 researchers said. "As policymakers evaluate ways to aid student borrowers, they may wish to consider policies that reduce the cost of tuition."The researchers suggested increasing state government investment in public institutions and easing the burden of student loan payments, such as through use of income-driven repayment.

"The study provides a nice run-down of policy implications," said Josh Wright, an economist at iCIMS. "To support homeownership, our government could look into: debt forgiveness programs, slowing the growth of tuition, and mortgage delinquency prevention programs."

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