Student loan debt causing a seven-year delay in homeownership

A $1,000 increase in student loan debt lowers the homeownership rate by about 1.5%, according to a recent Federal Reserve study. That’s equivalent to an average delay of about 2.5 months in attaining homeownership. For the average college debt holder with $37,000 in debt, that ends up being about a 7.7 year delay in their path homeownership.

Clever Real Estate did a survey of 1,000 current undergraduate students about how student debt is impacting their financial decisions, as well as a survey of 1,000 Americans about their spending habits and personal finance goals.  The survey found that 48% of undergraduates with student debt plan to put off buying a house because of their student loans.

Americans say that 28 is the ideal age to buy a home. However, the median college graduate with student debt doesn’t expect to be able to afford a home until age 35, which correlates with the data in the Federal Reserve survey. Students with no student debt, however, plan to buy a home by age 30.

“We found from our financial preparedness survey that 53% of millennial renters expect to become homeowners between the ages of 26 and 35. In reality only 37% of millennials were able to become homeowners in 2015, approximately 8 percentage points lower than the homeownership rate of Gen Xers and Baby Boomers at the same age,” wrote researcher Thomas O’Shaughnessy.

That student debt is the difference-maker for so many people when it comes to buying a home and not buying a home further serves to widen the economic divide between Americans. The Clever survey found that undergraduates with student loans are eight times as likely to take out an additional personal loan than those undergraduates without, and 71% of them are more likely to use a high-interest credit card, perpetuating a cycle of debt for lower-income families. This can make it more difficult for them to get approved for a loan with a favorable interest rate, and ultimately, cause them to miss out on the equity and wealth-building opportunities that homeownership offers.

There’s also a strong correlation between student loan debt and renting—as opposed to owning—a home.

“Homeownership rates were 36% higher among graduates who had paid off their student debt or never had student debt. When college graduates pay off their loans quickly, or have little to no debt to begin with, they’re much more likely to become homeowners. In fact, graduates that paid off their debt were (seven times) as little to own their home outright,” O’Shaughnessy wrote.

In 2012, 71% of all students graduating from four-year colleges had student loan debt. That represents 1.3 million students graduating with debt, up from 1.1 million in 2008 and about 900,000 in 2004, according to the Institute for College Access and Success.

As of July, Americans owed $1.59 trillion in student debt, an average of $37,172 per debtor. That’s more than three times the country’s total student loan debt in 2006, according to data from the Federal Reserve.

Part of the rise in debt is the difference between incomes and higher education costs. While the cost of tuition is going up, incomes have actually declined. The cost of a four-year college tuition, room and board was $23,872 in 2012, up from $18,344 in 2002, and the median income of a person with a bachelor’s degree was $40,241 in 2012, down from $55,604 in 2002, according to the U.S. Census Bureau.

Another sore spot is rising rents, which have made it difficult for young graduates to take advantage of living in cities where the job market supports higher salaries. In many cases, it may actually be cheaper to buy a home, and that, combined with record low interest rates, should make buying a home more attractive for recent graduates. In reality, however, more investors than ever are buying properties on the lower end of the scale, and lack of inventory means that recent graduates are having to look in price points that are well beyond their ability to save.