“It got sort of lodged in people’s minds that student debt was dragging down homeownership, but the evidence really doesn’t support that,” Dynarski said. “The dividing line between the haves and have-nots is not student debt, it’s a college education.”
Dynarski said the biggest flaw in the New York Fed study was lumping together college-educated people without debt and those who never pursued higher education, and then comparing their homeownership rates to those of debt-ridden grads. The problem, she said, is that researchers only used data from credit reports, which contain no information about education, to draw their conclusions.
The more recent Fed study combined credit reports with data on college attendance from the National Student Clearinghouse, discovering that the greatest disparity in homeownership rates is more tied to education than student debt. People without college degrees are more likely to own a home in their early 20s while their counterparts are hitting the books, but they lose that advantage around age 27. College graduates pull further away from those without degrees in their mid-30s, when their homeownership rates are 14 percent higher than people with only a high school diploma.
To be sure, college graduates with debt do have a harder time buying their first home than those without. Student loan payments are factored into the debt-to-income ratio that lenders use to determine a would-be buyer’s eligibility for a mortgage. Federal rules that took effect a few years ago restrict lenders from extending mortgages to buyers whose total monthly debt exceeds 43 percent of their monthly gross income. Given that ratio, a college graduate with $30,000 in student debt could easily have a difficult time purchasing a home a few years out of school.
However, once that graduate hits her 30s, when many people finish paying off their college loans, her chances of buying a home are about the same as a graduate without debt, Dynarski said. The burden of student debt, she said, is dwarfed by the disparities in earnings between those with a college degree and those without one. College graduates earn nearly twice as much a week as people with just a high school diploma, who also have double the rate of unemployment, according to the Bureau of Labor Statistics.
Still, having student debt could make it difficult to save for a downpayment on a house, especially in some parts of the country where a college degree has minimal impact on earnings, said Ralph McLaughlin, chief economist at Trulia, a real estate website. In the Midwest, where homes are inexpensive and the earnings premium for having a college degree is low, student debt makes it harder to buy a home. But in pricey parts of the country, such as Boston, and some cities in California, having a college degree could make it easier to save for a home because graduates enjoy higher earnings, he said.
“Student debt certainly affects young households,” McLaughlin said, “but in the long run, households with a college degree, even if they have debt, are going to be better off than if they did not have that college degree.”
Dynarski makes a compelling case for reexamining the impact of student debt on homeownership, but she only looks at undergraduates. People with medical, law or other graduate degrees have a higher chance of amassing six-figure debt that they may not pay off until their 40s. That kind of outsized debt, without comparable earnings, could hamstring would-be buyers.
But with all of the income-driven plans that cap borrowers’ monthly payments to a percentage of earnings, even people with large student debt stand a good chance of being able to purchase a home, Dynarski said. The debt-to-income ratio, after all, takes into account monthly debt payments, not the aggregate amount owed. What’s more, she said it’s not how much people owe that holds them back, but whether they can repay the debt.
People who fall the furthest behind on their student loan payments often have not graduated and are unable to get a job that pays enough to cover their monthly bill, according to the New York Fed. The borrowers with the highest chance of defaulting have less than $10,000 in student debt.
“We want to make sure that any reforms we do of the student loan system are on target, and the key problem is repayment, rather than the amount of debt,” Dynarski said. “Folks with a degree … are able to pay their loans, they are able to buy homes. It’s the people who have low earnings, who are dropping out of community colleges and for-profit colleges who are having problems.”
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