by Chris Herbert
The sharp rise in student loan debt over the last decade has caught everyone’s attention – the numbers are truly eye-popping. Estimates from theFederal Reserve Bank of New York found that the total value of outstanding student loans nearly quadrupled between the start of 2003 and the third quarter of 2012, from $241 billion to just under $1 trillion. Student loans now account for a greater portion of consumer debt than either credit cards or auto loans. And as the outstanding balance has grown, so too have delinquency rates. Together these trends have raised concerns that when today’s college graduates want to buy a home, they will have a hard time making the move, as their student debt will limit their ability to save or qualify for a mortgage. But while there is no doubt that more young people are shouldering significant student loans, it is important to look at how this rising debt is distributed across households, to assess how much of a drag on homeownership these loans are likely to become.
Reports of increases in student loan debt naturally conjure images of recent college graduates as the primary bearers of this burden. In fact, the increase in student loans has been felt across the entire age spectrum—with the largest share of the growth actually among those over age 40 (Figure 1). As of 2012, aggregate outstanding student loan debt was more or less evenly divided between borrowers under age 30, between 30 and 39, and 40 and older. Looking back at 2005, student loan debt was more concentrated among those under age 30. But since then, borrowing has grown more rapidly for those in their 30s and over 40. While information is not available on the uses of these loans, it seems likely that borrowing has increased both for 30-somethings going back to graduate school as well as for parents helping to finance their children’s educations. Whatever the explanation, it is clear that the student loan burden is not just affecting recent college graduates.
Source: Federal Reserve Bank of New York, Consumer Credit Panel/Equifax.http://www.newyorkfed.org/studentloandebt/
It’s also important to consider how the increase in borrowing is distributed across the young households who might be interested in buying a home. One reason aggregate borrowing has increased so much is that more young people are taking out student loans. Data from the Survey of Consumer Finances indicates that among those under age 30, the share of households with a student loan increased from 30 percent to 41 percent between 2004 and 2010, while among those age 30- 39 the share jumped from 21 percent to 34 percent. However, while the number of borrowers increased, the typical amount borrowed barely budged (Figure 2). The median student loan debt among those under 30 was essentially unchanged in real 2010 dollars over this period, at about $11,000. Among those age 30-39 the median was likewise fairly constant at about $15,000. So while more young people were taking on loans, for most borrowers the amount of debt was not significantly higher than in the past.
But over the same period, the average loan amount has shown more of an increase, up by nearly $4,000 among those under 30 and more than $6,000 for those aged 30-39 (Figure 2). The divergence in trends between median and average borrowing amounts signals that there has been a jump in the share of borrowers taking on sizeable amounts of debt. Among those under 30, the share of borrowers with outstanding debt exceeding $50,000 increased from 5 percent of borrowers to 10 percent and for those 30-39 this share jumped from 14 to 19 percent. While these borrowers account for a minority of all those with student loans, they account for a big share of the growth of total debt outstanding, representing70 percent of the rise among those under 30 and 79 percent among those 30-39. So a non-trivial portion of the problem of mounting student loan debt is concentrated in a minority of households.
Source: Joint Center tabulations of Survey of Consumer Finances.
In assessing the impact of student loan debt on the ability of young adults to buy a home, it is also important to consider what share of income young renters are devoting to their monthly student loan payments. (In fact, many of those with student loans already own a home—including 30 percent of those under 30 and 61 percent of those 30-39.) In 2010, the median renter under 30 and aged 30-39 both faced a monthly student loan payment of $150. The range of loan payments was also identical for these two age groups, from $50 per month at the 10th percentile of the distribution up to $500 per month at the 90th percentile. But when we sort households by the share of monthly income needed to make these student loan payments, households under 30 are found to face higher burdens because their incomes are lower at this stage of life. The median renter under 30 devoted about 6 percent of their income to student loan payments, while those 30-39 paid a little less than 4 percent (Figure 3). (Of note, these figures only cover those actually making payments on their loans; due to deferments and defaults nearly half of borrowers under 30 and a third of those 30-39 did not have payments reported on their loans.)
Source: Joint Center tabulations of Survey of Consumer Finances.
While these amounts are not trivial, by themselves they shouldn’t be enough to put homeownership out of the running. The CFPB just released guidelines that establish a 43 percent debt to income ratio for qualified mortgages. Under this guideline, after paying their student loans, the median young renter would still have room for a sizeable housing payment (though car and consumer debt must also be figured in). However, for borrowers at the upper end of the distribution of student debt burdens, their loan payments are likely to create a greater constraint: while renters under 30 at the 75th percentile are paying 10 percent of their monthly income for student loans, at the 90th percentile the burden rises to nearly 20 percent.
Overall, while the rise in student loan debt is certainly a cause for concern, it may not be as significant a drag on the ability of young adults to move into homeownership as many fear, since the typical borrower has not seen a significant jump in the amount of debt incurred and seems to have a manageable monthly payment. On the other hand, with much of the increase in student debt among both those age 30-39 and even older households there may be more need for concern about the impact of these loans on the ability of existing homeowners to balance their household budgets and save for retirement.