Mortgage

Arrested development: The long-term consequences of student debt on the housing economy

High default rates could spell disaster for future homeownership

I recently returned to my alma mater, the University of Texas at Arlington, for graduation ceremonies. As I watched my friends walk across the stage, my heart swelled with pride at being back, singing our fight song, and of course, wearing the blue and white.

But I’m one of the lucky ones. I found a good job when I got out of school and my student debt is lower than average, and most importantly, manageable.

Even so, it took me a few years after graduating to finally feel like I was on solid ground financially. Not everyone in my generation is so fortunate. Many Millennials struggle in their post-college life as the cost of higher education continues to skyrocket. 

As Millennials grapple with paying off student loans, their opportunity to buy a home gets pushed further and further into the future. That delay has consequences far beyond individual students — the growing student debt crisis impacts every part of the economy. 

THE STUDENT DEBT CRISIS

Homebuyer demand exploded in 2017, and is expected to continue to surge in 2018, according to RE/Max and other real estate experts, fueling rising home prices, low inventory levels and increased competition.

Millennials, those who were born between 1980 and 1995, are now increasingly entering the housing market, according to numerous reports, including Ellie Mae’s Millennial Tracker. However, for would-be first-time buyers, student debt remains the biggest obstacle to homeownership.

Currently, an overwhelming majority of Millennials with student debt do not own a home, and believe this debt is the cause for the delay, a recent study from the National Association of Realtors and nonprofit American Student Assistance showed. NAR estimates this student debt could be delaying homeownership for up to seven years.

And a new study shows the student debt crisis could be even worse than experts originally thought. Currently, at nearly $1.4 trillion in outstanding loans, student debt is the second-largest source of household debt after housing, and the only form of consumer debt that continued to grow after the Great Recession, according to a report from The Brookings Institution, a nonprofit public policy organization.

The Brookings report analyzes new data on student debt and repayment released by the U.S. Department of Education in October 2017. The study found that a shocking 40% of students who entered college in 2004 will default on their student loans by 2023. 

And students who attend for-profit universities are even worse off. Of these students, a full 52% are expected to default on their loans after 12 years, versus the already high 26% of public borrowers. That’s because the six-year graduation rate for those who attend for-profit colleges is only 23%, compared with 59% at public schools and 66% at private nonprofit schools, according to the National Center for Education Statistics as quoted in a 2017 Slate article. That means that the vast majority of those former students still work in low-paying jobs, but also have to figure out how to pay off the debt they accumulated. 

The cost of attending college anywhere has become increasingly unaffordable. Since 1982, the typical family income increased 147% more than inflation, according to the National Center for Public Policy and Higher Education. However, the costs of a college education from 1985 have risen nearly 500%. 

To put that in dollar terms, that means if the cost of tuition was $10,000 in 1986, it should cost that same student $21,500 today if it moved at the same rate of inflation. However, today a college education would cost that student $59,800, or more than 2.5 times the inflation rate, according to Gordon Wadsworth, author of “The College Trap.” 

But despite the rising costs of tuition, more Millennials attend college than any other previous generation. 

Data from the Pew Research Center shows 21% of Millennial men and 27% of Millennial women had completed at least a bachelor’s degree at the ages of 18 to 33, compared to 18% of Gen Xer men and 20% of Gen Xer women. 

The gap grows even wider when reaching back to older generations, such as Baby Boomers, where 17% of men and 14% of women completed their bachelor’s degree between the ages of 18 and 33, or the Silent Generation, where 12% of men and 7% of women completed their degree. 

Millennials not only spend considerately more on their education than other generations had to, they also have to compete
with more college graduates for the same jobs.

All of this combines to make this generation less equipped than previous generations to fully enter into the U.S. economy after graduating. Many live at home longer than previous generations or choose to rent rather than stepping up to a mortgage payment. 

The latest homeownership report from the U.S. Census Bureau showed that among the younger generation, usually first-time homebuyers, the homeownership rate rests at just 36%. As is to be expected, this is much lower than older generations, where the homeownership rate is significantly higher at 75.3% for those aged 55 to 64 years and 79.2% for those aged 65 years and older.

But not only does it pale in comparison to the current homeownership rate of the older generations, but it is also historically low for the 35 and younger age group. This group hit a record low in 2016 with its rate of 34.1%. During the recession, the under-35 homeownership rate dipped below 40% for the first time since before the turn of the millennium,
and continued to decrease into 2016.

 

BREAKING IT DOWN

As the student debt crisis deepens, minority groups are hit the hardest. In 2013, the median net worth of blacks in the United States
was $11,030 — far below the median net worth of whites at $134,230, according to data from the Economic Policy Institute. 

Even when looking at college graduates, that gap remains, as black college graduates in 2013 had a median net worth of $23,400, while white college graduates had a median net worth of $180,500. 

And unfortunately, the gap persists even when considering those with advanced degrees. Among blacks with a graduate or professional degree, the median net worth was $84,000 in 2013, compared to $293,100 for whites.

The net worth gap becomes clearer when you consider that the black homeownership rate is only 42.1%, significantly below the white homeownership rate of 72.7%, according to the U.S. Census Bureau. During 2015, the most frequently cited reasons black applicants were turned down for mortgages included 31% for credit history, 25% for debt-to-income ratio and 13% for collateral, according to data analyzed by the Pew Research Center. 

This is compared to the most frequently cited reasons white applicants were turned down for mortgages, where debt-to-income was the No. 1 reason at 25%, followed by credit history at 21% and collateral at 18%.

The statistics illustrate a vicious circle. Black students entering college with lower net worth may need more loans, but have less of a fall-back when they graduate, raising the odds of default. The Brookings report showed default rates among black first-time college students in the 2004 cohort at 38%, and projected the 20-year default rate at as much as 70%.

Defaulting on student loans impacts credit history, cited above as the main obstacle for getting a mortgage loan. Over the long haul, the financial consequences of renting instead of owning a home are significant, contributing even more to the gap in net worth.

And the crisis extends not only through races, but also through generations. As it turns out, Millennials are not the only generation struggling with student loans, though they are the generation with the greatest burden. Millennials currently hold about 65% all student debt, but the fastest-growing population of student borrowers are over 60, although they still make up only 5% of total borrowers.

Gen Xers hold the second-highest share of student debt, and a report from iontuition, which provides student loan counselors and other repayment tools, shows 50% of Gen Xers and 14% of Baby Boomers are still repaying their student loans.

What’s more, nearly 40% of federal student loan borrowers age 65 and older are in default, according to a report by the Consumer Financial Protection Bureau.

Student debt, including debt taken on for children, is causing even older generations to delay key milestones such as having a family, buying a home or retiring.

 

THE SOLUTION

As the student loan crisis continues, the housing and mortgage finance industry should be especially concerned with finding a solution in order to help improve the homeownership rate among younger generations and minorities. 

Currently, some lenders offer programs which allow those with student debt more options when it comes to home buying, including lenders who use Fannie Mae’s recently adopted products which allow for student loan cash-out refinances and other options. The Fannie Mae program expands on an initiative the GSE rolled out with SoFi back in November 2016.

Eagle Home Mortgage, a mortgage lender and a subsidiary of Lennar, announced that it is rolling out a new mortgage program that will help homebuyers pay off their student debt. The program offers borrowers 3% of the price of their Lennar home, or as much as $13,000, that can be used to pay off student loan debt. 

And one school, City College in San Francisco, announced it will now be free of charge to all the city’s residents. But while this could help students graduate without debt, solutions such as this could also place homeownership even further out of reach as it increases property taxes in the surrounding area.

Of course, lenders are already trying to help the student loan crisis by offering more information on srepayment terms and conditions, available repayment plans, student loan interest rates and help determining what monthly student loan payments should be.

Business owners are also in a place to help student borrowers through the benefit packages they offer. According to a survey conducted by iontuition, many respondents indicated that they would prefer loan repayment assistance over retirement or health care benefits. But despite 60% of borrowers saying they preferred this, only 4% of employers offered this benefit in 2016. 

What’s more, data from iontuition shows that, based on a $60,000 salary, the cost of student loan assistance would only total $1,200 per year, which is less than the $1,800 cost of matching a 401k at 3% and the $3,200 cost of three weeks of paid vacation.

Respondents from iontuition’s survey showed even simple solutions such as online tools from  lenders could be helpful in lowering financial stress. 

While there are ways forward in dealing with the student debt crisis, it will take first recognizing the problem and its consequences, and then innovating new products and benefits that will help Millennials and even older generations move forward. 

Overall, 40% of college entrants could struggle to repay their loans, and eventually fall into default. This represents a severe crisis for the student loan market, and could have devastating impacts on their ability to purchase a home.

But lenders have the unique opportunity to reach student debt borrowers and offer new and unique solutions that wrap student loan debt into the purchase of the home.

Current estimates show Millennials will be paying off their student loans for years to come. While it currently means delaying homeownership for several years, as times goes on, it could begin to delay retirement plans and affect other areas of the economy. And the crisis could continue to worsen, as there are still no solutions in sight for Generation Z, the oldest of whom are now entering their college years. 

However, there is hope. Even though total student loan debt more than tripled over the last 10 years, with a serious delinquency rate of at least 90 days late surpassing any other type of debt, a study by Fannie Mae also showed those who graduate college are about 43% more likely to eventually buy a home than those who never attend college. 

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