Loosening the Yoke of Student Loan Debt

A student graduate stands on a cliff with a student debt bill.

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Increased down payment assistance and other federal government interventions are the bridges that will help student loan debt holders make the leap into sustainable homeownership, said experts speaking Wednesday at a National Association of REALTORS®–hosted the webinar, “The Impact of Student Loan Debt: Examining the Burden and Finding Solutions.”

A study released last month showed that half of non-owners who hold student loan debt are delaying their purchase of a home because of that debt. At the webinar, Jessica Lautz, vice president of demographics and behavioral insights at NAR, presented a deep dive into the results of the study, produced by NAR and Morning Consult. She was joined by experts from the Mortgage Bankers Association, the National Fair Housing Alliance, the Student Borrower Protection Center, and New America, a nonprofit focused on finding solutions to the technological and social challenges facing Americans.

Panelists said the inability to save for a down payment and an unfavorable debt-to-income ratio are key factors holding potential home buyers back—and the effect is greatest on millennials and people of color.

Pandemic Stimulus Helped Some—But Not Enough

Experts had hoped that the pandemic stimulus packages, which included a zero-interest period on federal student loan debt, would give debt holders the opportunity to get ahead on payments or even pay loans off. But the effect wasn’t as great as anticipated, Lautz said.

While 38% of respondents in the NAR study said the pandemic stimulus put them closer to paying off their debts, a majority of respondents (54%) said the stimulus packages didn’t help. In addition, Lautz said student loan debt is depressing “headship” rates—that is, the rate of individuals moving out of a family member’s home after college—for millennials and for people of color. Sixty-two percent of millennial respondents, 52% percent of Black respondents, and 65% of Hispanic respondents reported they were delaying a move to their own household.

“Most millennials aren’t able to move out because they are carrying significantly higher levels of debt than previous generations,” Lautz said. “Hispanic and Black borrowers also show a difference when compared to white borrowers. They have higher student debt and lower earnings after they graduate.”

And the hot housing market won’t make circumstances any easier for debt-burdened buyers. The lack of supply and rising prices, combined with multiple and all-cash offers, could potentially squeeze out even more buyers, said Hannah Pitz, assistant director of housing finance policy at the Mortgage Bankers Association.

The MBA is urging down payment assistance as a solution. “Congress needs to provide more resources to help buyers afford down payments, particularly in underserved communities,” said Pitz. “It’s an important step in narrowing the racial homeownership gap.”

Parents Are Taking on Debt, Too

The amount of debt held by older individuals is also rising as parents take on debt on behalf of their children in the form of PLUS, or Parent Loan for Undergraduate Students, lending. There’s a large gap between the loan amounts students can obtain and what it takes to get students onto campus, said Rachel Fishman, deputy director for research at New America. Parents must often step in to make up the difference.

Fishman noted that there are many costs a student incurs aside from tuition, such as housing, food, books, medical care, and sometimes child care, with one in four students is caring for a dependent. And as with more traditional student loans, Black families are more heavily burdened by PLUS loans than white families, said Fishman, leading to racial inequity and income disparity that is passed on to the next generation.

Fishman said that supporting income-driven repayment methods and gathering data on PLUS loans could potentially help students and families. She added that the penalties that schools can incur for a high default rate on student loans should also apply to PLUS loans. Currently, a college or university risks losing its ability to provide federal student loans if its default rate is higher than 30% for three years in a row.

“Colleges need to be held accountable,” she said. “They’re currently held accountable for the number of defaults on student loans. But the same isn’t true for PLUS loans.”

Nikita Bailey, senior vice president of public policy at the National Fair Housing Alliance, offered further sobering statistics on the disparate impact felt by borrowers of color. After 20 years in repayment, she said, the typical Black borrower still owes an astonishing 95% of the original loan amount, making repayment a struggle. And individuals who don’t attend college are likely to find their job prospects limited.

“The pursuit of higher education is not a luxury but a necessity,” said Bailey. “Black bachelor’s degree graduates are more likely to default on loans. Long term, this threatens to shrink the available pool of homeowners.” Bailey advocated down payment assistance and the Keys Unlock Dreams initiative as possible solutions.

Debt Woes Won’t Abate Without Intervention

Continuing on the current course, the housing market is likely to see an increase in the dampening effect of student loan debt. From 2007 to 2021, student loan debt has outpaced other areas of consumer credit in terms of its percentage share of total household debt, according to the Federal Reserve Bank of New York. Ben Kaufman, head of investigations and senior policy advisor at the Student Borrower Protection Center, said students currently owe $1.7 trillion. That’s roughly the gross domestic product of Canada, the world’s tenth-largest economy.

“More people are borrowing, and they are borrowing more,” said Kaufman. Though millennials might hold the largest share of student loan debt, he said, such debt is increasing across all age groups, and it hits the most vulnerable communities the hardest. He added that there is very little consumer protection for student loan borrowers.

The solution, according to Kaufman, is for people in the housing industry to speak out. “Grab your seat at the table,” he said. “Boldly make your voice heard.”