Every month there are many articles and think pieces published regarding millennial spending habits and home buying. The articles encompass a wide range of ideas including commentary on perceived frivolous spending vis-à-vis avocado toast or the latest business negatively impacted by millennial spending habits. I am a millennial in the market to buy a home, and I see student debt as the too-often-ignored elephant in the room whenever discussing millennials and their fiscal situations. Student debt is not an all-inclusive explanation for the low rate of millennials buying homes, but it is the best place to start this series of blogs that focus on millennial home buying.
Student loan debt is the second largest amount of debt held by Americans. And it has held this position since it surpassed the amount of auto loan debt and credit card debt in 2010. As of Q1 2017, Americans have $0.76 trillion in credit card debt, $1.17 trillion in auto loan debt, and a whopping $1.34 trillion in student loan debt. For a quick comparison, in Q1 2007 student loan debt was only $0.51 trillion which is a 230% increase in just 10 years!
Student loan debt is largely held by young people who are at the start of their earning potential. A recent college graduate, who is now vying for or working at an entry level job, has an average student debt amount of approximately $37,000 with a monthly payment of $350. These young people often have trouble making their monthly payments, which results in student debt being the type of debt with the highest delinquency rate. The delinquency rate of student loans is approximately 11%. In contrast, credit card debt has the second highest delinquency rate at 7.5% and mortgage debt has only a 1.7% delinquency rate.
As the total national student loan debt amount rises, the homeownership rate of people under 35 years of age is falling. The following graph shows these figures from 2003 to 2017 to illustrate the phenomenon. While it is important to note that such a graph does not demonstrate causation, we can clearly see the decrease in homeownership rates while student loan debt steadily climbs.
Most people would expect that such a large increase in student debt would translate to individuals tempering goals of higher education until the need to take on student loans would be lower. But young people are constantly told that a college degree is the only path to success. They are told about how easy it is to get a student loan, and student loan debt continues to rise. In July 2017, the Federal Reserve Bank of New York released a report regarding rising tuition costs and homeownership. The report explores the connection to rising tuition, rising student loan debt, and decline in homeownership for 30-year-olds. Two observations that provide valuable insight into the situation facing millennials involving student loan debt and buying a home are:
1. “Our evidence is consistent with American students having accommodated such large positive shocks to the cost of college not by forgoing schooling, but instead by amassing substantially more student debt.”
2. “In a 2013 American Student Assistance (ASA) survey of 259 young professionals, 75 percent reported that student debt had affected their ability to purchase a home (ASA 2013).”
The dramatically increasing tuition costs are not deterring young people from going to college, but instead encouraging them to amass more debt before they have entered the job market. Then after these debt-burdened young people enter the work force, they are hindered by this pre-existing debt as they set their sights on homeownership.
One may ask, if the average monthly student debt payment is only $350, why is it such a burden on millennials? We have an answer using compelling visualizations coming in part 2 of this blog series!
Up Next: SP Group Explores the Budget of the Average Millennial
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