Is college debt truly keeping a generation of young adults from buying homes?
That’s been the popular storyline as people in their 20s have shunned the housing market since the housing crash. Economists seeking explanations for a change in behavior, and worried about a long-term drag on the economy, have theorized that the slowdown was due largely to a record level of student loan debt in the country — about $1.3 trillion. The narrative: Struggling recent college graduates can’t buy homes and will continue to be deterred from buying because they are shackled with immense college loans.
But Susan Dynarski, a University of Michigan economics professor and fellow of the Brookings Institution, is challenging that argument in a new paper. She says that a surprising number of respected economists have adopted an alluring narrative of millennials unable to buy homes even though it’s one built on flawed evidence that has been debunked by research done for the Federal Reserve Board of Governors more than a year ago.
The real drain on home buying, she says, comes from people who haven’t gone to college, rather than those who have graduated with debt.
While people fresh out of college have not been avid homebuyers in their 20s, she said data on home buying shows that once people are in their 30s, they are buying at rates similar to the past. And this is true, she said, even if they have student debt.
She has been frustrated at the resilience of the old narrative, which began from a New York Federal Reserve study that linked record student loan debt with the absence of homebuyers. It was deficient because the researchers didn’t examine who had gone to college and who hadn’t, she said. Now, the Federal Reserve Board of Governors data goes further, and she used that research in her own. She hopes, she said, to shake the election year rhetoric about student loans that is not based on anything tangible.
“It makes my head explode,” she said.
The real problem with student debt, she said, is not for people who complete bachelor’s degree college programs and leave college with the $30,000 in debt that’s average among those who borrow. Rather, she said, defaults on student loans are high among another group: students who attended community college or for-profit colleges for a while and dropped out with debt.
Further, the absence of home buying is much more prevalent among people who never went to college, rather than those who did and left with college loans, she says. Even in their 30s, the noncollege graduates are sitting out the home-buying market in large numbers.
By the time people are in their 30s, the homeownership rate of college-educated people with loans, and those without loans, “is statistically indistinguishable,” she said. Student loans typically are paid off in 10 years, so by their 30s many graduates are free of the debt.
“The striking gap in home buying,” she emphasizes, “is in the group of people who stopped their education with high school.”
When students get college degrees their earnings are much higher, so they can pay off college loans and buy homes in their 30s, she said.
The Federal Reserve Board study used for her research does show that when students increase their loans by 10 percent for four years of college, there is a 1 to 2 percentage-point drop in homeownership during their first five years after exiting school. Between 2005 and 2014, there was a 9 percentage-point drop in homeownership among people ages 24-32.
But Dynarski says a five-year impact is not a long-term issue.
“Instead of worrying about college students coming out of college with debt, we should be trying to get more people to go to college because it pays off tremendously” and allows people to buy homes, she said. Over a lifetime the college graduate is going to make about $600,000 to $1 million more than the high school graduate, she added, noting even grads in lower-paying fields can afford the typical college loan payments.