College debt is still keeping grads from buying homes

Young people are still drowning in student loans, and that debt is holding them back from reaching grown-up financial milestones, like buying a house, according to a new report Tuesday.

The housing market recovered a bit last year as home prices rose 11 percent and overall mortgage debt increased, but 30-year-olds missed out on most of those gains, says the report by the Federal Reserve Bank of New York. Researchers also found that those with student loans were less likely to own a home than those without college debt.

The Fed's data shows that after home ownership rates fell for all groups during the financial crisis, 2012 was the first year in which young people with student debt had lower home ownership rates than people without student debt. In the nine years prior, going back to 2003, student loan borrowers enjoyed higher home ownership rates, a trait researchers attributed to the idea that people with student loan debt likely have higher levels of education and presumably higher earning potential.


Source: Federal Reserve Bank of New York Consumer Credit Panel, Equifax. The Washington Post.

But these days, student debt is looking more like a burden than a sign of privilege. For a generation of young workers facing a tougher job market and lower earnings potential than previous generations, student loan debt is one more financial burden. As my colleague Dina ElBoghdady reported earlier this year, the growing student loan burden may be keeping many workers from becoming first time homeowners. Federal rules introduced in January limiting how much debt prospective buyers can take on are meant to protect borrowers, but they could also make it difficult for recent graduates with student loans to qualify for a mortgage.

Tuesday's report also showed the share of 25-year-olds with student debt continued to rise, with the average balance slightly increasing to $20,926 in 2013 from $20,326 in 2012. These amounts are dramatically higher than they were about a decade ago; in 2003, the average student debt load was just $10,649. This growing debt load could be making it harder for young people to manage all of their bills, an issue that could also be impacting their credit scores. While credit scores increased last year by 2 or 3 points on average for all 25-year-olds and 30-year-olds, those without student debt had higher credit scores than those without college loans.

Some economists argue the struggles created by student loan debt are not unique to the latest recession. Beth Akers, a fellow in the Brookings Institution, wrote last week that student loan borrowers have long had lower home ownership rates than people without student debt. Akers analyzed data from the Survey of Consumer Finances going back to 1989 and found that prior to 2004, young people (ages 28 to 32) without college debt were more likely to own homes than those with student debt.

On a positive note, millennials aren't completely frozen in place. More of them are upgrading their cars, the report showed. Similar to the housing market, car purchases dropped during the recession. But the share of 25-year-olds taking out auto loans increased across the board in 2013, regardless of whether or not young people had student loan debt.

Jonnelle Marte is a reporter covering personal finance. She was previously a writer for MarketWatch and the Wall Street Journal.
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