By Sarah Friedmann
Young Americans owe a staggering $1 trillion in student loan debt – an amount that could purchase the equivalent of 5-6 million typical American homes, according to Kiplinger. In fact, following the release of a new Federal Reserve Bank of New York report detailing household debts and credits, USA Today’s Susan Tompor reported on March 14 that millennials are “so buried in debt that they can’t buy into the American dream of owning a home.” There’s a proven link between decreasing homeownership among millennials and high student loan debt and, if young people are going to participate more readily in the homeownership arena, significant student loan reform will need to take place. Indeed, many politicians seem to recognize the urgency of this issue, as student loan reform is becoming a hallmark of the 2020 presidential campaign.
Loan Debt: A Primer
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Student loan debt in the United States generally consists of two different types – federal loans and private loans. The first federal student loans in the United States were offered in 1958 under the National Defense Education Act, and the program has grown significantly since that time. Federal student loans are backed by the U.S. government and their interest rates are controlled by Congress. In contrast, private student loans are those provided by independent financial institutions. Their interest rates are typically higher than those of federal loans and repayment options are generally less flexible. As the New York Times reported, prior to 2010, private lenders made the majority of student loans. However, the financial crisis of 2007-2008 prompted the government to take significant regulatory action – and, resultantly, the federal government now disburses around 90 percent of all student loans.
Student loan debt has grown significantly over time. In fact, a 2017 report from Experian found that student loan debt had increased by 150 percent in a ten-year period, largely due to the rising costs of college tuition. As of 2019, the average American borrower now has around $33,000 in student loan debt, Forbes reported. Large dollar loans have made repayment challenging for many Americans, as around 1 million people default on their student loans every year, CNBC revealed in August 2018. Indeed, a January 2018 study from Brookings reported that almost 40 percent of borrowers are expected to default on their loans by 2023.
A Vicious Cycle
Substantial student loan debt has forced many American millennials — those born between the years 1981 to 1996 — to shift their financial priorities. This shift often includes delaying homeownership or eliminating it as an option altogether. In a study released in January 2019, the Federal Reserve Bank of New York found that homeownership rates for people ages 24 to 32 decreased by almost 9 percentage points. Notably, the agency discovered that almost 20 percent of this decrease in homeownership was due to student loan debt. In fact, the Fed estimated that 400,000 young Americans couldn’t purchase homes last quarter due to their educational debts.
These numbers are even more jarring when examined directly from the perspective of potential millennial buyers. A September 2017 survey from the National Association of REALTORS® (NAR) found that over 80 percent of millennials who haven’t purchased a home cited their student loans as contributing to their inability to become a homeowner. The survey also found that millennials very much desire to own homes, but they’re having a difficult time achieving that goal. “Student loan debt holders do want to own a home, that’s part of their American dream,” Jessica Lautz, the managing director of survey research at the National Association of REALTORS®, said to CNBC in April 2018. “It’s just really hard to get there right now.”
Many millennials have spoken openly about their homeownership struggles in recent years. In an interview with Crain’s Chicago Business in March 2019, Vikas Gandhi, a 29-year-old Illinois resident, said that he and his wife had been considering purchasing a home, but had to delay their homeownership ambitions because they wouldn’t be able to secure a sufficient mortgage loan. Gandhi said that the loan was out of reach due to their collective $125,000 in educational debt.
"We're going to have to keep renting until we're in a better financial spot to buy,” Gandhi told the outlet. He also emphasized that delaying homeownership has become commonplace among millennials. "That's the norm among people our age," Gandhi said to Crain’s. "You just don't even think about buying a house because of your student loans."
In addition to having difficulties acquiring mortgage loans, many millennials are also struggling to afford down payments on homes because of student debt. An Apartment List study of 6,400 millennial renters found that “those with student loan debt will be significantly delayed in their ability to purchase a home.” The study’s authors, Chris Salviati and Rob Warnock, reported that an estimated “23 percent of college graduates without student debt can save enough for a down payment within the next five years, compared to just 12 percent of college graduates who are currently paying off student loans.”
Easing the Burden?
To help combat the student loan debt crisis, several reforms were introduced during the Obama administration. These included the creation of the Public Service Loan Forgiveness program, which allows most 501(c)(3) and government employees to have their federal student loans forgiven after ten years. Obama’s administration also employed reforms that allowed federal borrowers to enroll in income-based repayment plans that are limited to 10 to 15 percent of their income and to have their loans forgiven after 20 years, among other initiatives.
However, recently, the current presidential administration has sought to roll back some Obama-era student loan reforms. For example, in April 2017 the Department of Education rescinded two Obama administration memos designed to ensure that borrowers have their student loans serviced by companies with strong track records of treating borrowers well, NBC News reported. Moreover, President Trump’s proposed 2019 budget has suggested eliminating the Public Service Loan Forgiveness program, restructuring income-based repayment so that all borrowers pay a flat percentage of their income, and eliminating subsidized student loans, which could increase student loan debts. Notably, the president’s budget proposal is not binding and final budget decisions are made by Congress. Due to the Democratic majority in Congress, Trump’s proposed budget is unlikely to pass, CBS News noted on March 12.
Student loan reform is perhaps currently somewhat stagnant at the federal level, though many politicians are anxious to re-prioritize the issue. For example, on Feb. 28 two U.S. senators proposed a bipartisan bill that would prohibit states from revoking professional or driver’s licenses if people don't pay their student loans – something currently allowable by law in many states. Moreover, various Democratic 2020 presidential candidates have incorporated student loan reform as significant parts of their platform. “You’re going to see some pretty bold proposals on debt relief or debt cancellation from candidates,” Mark Huelsman, the associate director of policy and research at Demos, a think tank, told MarketWatch on March 12. Some of these proposals could include the government using federal tax revenue to help fund student loan forgiveness or providing tuition-free college to offset future debt problems.
The Root of The Crisis
Most financial experts agree that the American student loan crisis is a significant problem — one that’s best fixed with a multi-pronged approach to ensure that millennials have a financially-secure future that can include homeownership, if desired. Generally, according to the Chronicle of Higher Education, there are four main issues the encompass the problems with student loans in the United States: potential student borrowers aren’t educated enough about the consequences of taking on loans, students are borrowing too much (and colleges are charging too much), people can’t afford their loan payments, and borrowers are confused and overwhelmed by repayment options.
As the Chronicle noted, solutions for these problems include a combination of improved borrower education, revamped repayment systems that make it easier for borrowers to enroll in income-based repayment or discharge their loans, laws that mandate that colleges limit admitted student debt levels and reduce tuition, and even enrollment of borrowers in automatic, income-based paycheck deductions for their loan payments. As the New York Times pointed out, this paycheck deduction option was one of many approaches that helped remedy Australia’s student loan crisis.
Considering the significant linkage between homeownership and student loan debt, the National Association of REALTORS® generally supports student loan reform efforts. The organization backs policy initiatives that allow borrowers to refinance student loans for lower interest rates and supports tax relief for both student debt holders and those who have had their loans forgiven. Moreover, the NAR strongly believes in borrower education reform, and supports policies that help simplify and clarify the student loan process. Finally, the organization advocates to ensure that mortgage underwriting guidelines about student loan debt do not inhibit people from owning homes.
As the student loan crisis continues to significantly affect many areas of millennials’ lives, including homeownership, it’s clear that concerted reform efforts – from the government, the higher education field, the housing industry, and more — need to occur in order to ensure generational prosperity.
