Real Estate

What do subprime mortgages and student loans have in common?

Expert says America's student loan woes resemble the subprime mortgage crisis

Higher education has always represented a gateway to financial stability in America, especially for those pursuing the American dream of homeownership.

But let’s be real, America’s students and recent graduates are seriously debt-burdened.

In the last two decades alone, the nation’s students have accumulated roughly $1.5 trillion worth of loan debt. This outstanding total, which makes student debt the second-largest type of debt Americans hold, is so large it could finance the purchase of every single home on the market in the U.S. twice.

And that staggering increase in debt is making it difficult for younger people to become homebuyers. The typical student borrower struggles to afford a single-family home, as data indicates student loan debt has contributed to a decline in consumers’ ability to afford a house.

Of all generations, Millennials, who have been cited as the most educated generation in history, and Gen Z, who now carry the highest student loan debt in history, are struggling the most to afford housing.

According to realtor.com, Millennials, who make up 34% of all student borrowers and hold about $498 billion in student debt, have an average student loan balance of $33,000 per borrower, which is $7,000 more than the typical down payment on a median-priced home.

Clever Real Estate, an online real estate marketplace, indicates that although 84% of Millennials believe homeownership is part of the “American Dream,” a whopping 48% of undergraduates are putting off buying a home because of their student loans.

This debt paired with stagnant wage growth and a rising cost of living is pricing out many would-be buyers. As the nation’s student debt is projected to cross $2 trillion by 2022, data shows more and more young Americans are likely to opt-out of homeownership in favor of renting, simply because they cannot afford to buy.

In fact, a study from Apartment List indicates nearly half of Millennial renters had no down payment savings in 2019, while at least 12.3%, an increase of 2% from 2018, has no plans to purchase a home.

If this rate continues to climb it could have serious economic repercussions for the nation, as the housing market accounts for a sizable chunk of the overall economy.

In fact, one observer is now suggesting that student loans are beginning to resemble one of the main causes of the last financial crisis.

In a recent NPR article, Mike Calhoun, the president of the nonprofit Center for Responsible Lending, said America’s student loan woes are starting to resemble the subprime mortgage debacle of the early 2000s.

Calhoun spent many of the years preceding the housing market crash warning state lawmakers and prosecutors about the risks of reckless subprime loans. He said he believes that just like the housing crisis, there’s very little consideration about whether or not students can pay back their loans.

According to Calhoun, experts in the student loan world are now seeing default levels that are similar to the subprime mortgage world of a decade ago. These defaults have negatively impacted borrowers’ credit scores, and thereby, their ability to qualify for a mortgage.

“Once again, it’s the mismatch between the debt and the borrower’s income, their ability to repay,” Calhoun said. “This time around it’s the government making the vast majority of the loans. That’s effectively turned the Department of Education into the country’s largest consumer lender.”

So while the makeup and potential consequences of the student loan issue are different that the subprime mortgage crisis, it goes to show that those who forget history are doomed to repeat it.

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