Young Student Loan Borrowers Are Bagging the Home Mortgage and Auto Markets


NEW YORK (MainStreet) —In a new study, the Federal Reserve Bank of New York found that for the first time in at least ten years, 30-year-olds with no history of student loans are more likely to have home secured debt—the benchmark used to track home ownership—than those who have had or still have student loans.

In the April 17 report, "Young Student Loan Borrowers Retreat from Housing and Auto Markets," senior economist Meta Brown and senior researcher Sydnee Caldwell, both of the New York Fed, examined trends in home mortgage and auto debt for people with current or past student loans. The Fed reported a decline of student borrowers’ use of non-student loan debt—consumer debt by any other name—since the start of the recession.

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“Student debt holders have higher levels of education on average and higher incomes” than their counterparts that have never had student loans, the report said, in which Brown and Caldwell were expressing their own views and not necessarily those of the New York Fed or the Federal Reserve System. “These more educated consumers are more likely to buy homes," the report read. "The home ownership difference between student debt holders and others expanded during the housing boom: by 2008, the home ownership gap between the two groups had reached 4 percentage points, or almost 14% of the non-student debtors’ home ownership rate.”

This relationship changed dramatically during the recession, the Fed said, when “home ownership rates fell across the board. 30-year-olds with no history of student debt saw their home ownership rates decline by 5 percentage points. At the same time, home ownership rates among 30-year-olds with a history of student debt fell by more than 10 percentage points.” The Fed study found that participation in the car market paralleled the housing market.

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While students and non-students saw steep declines in their use of auto debt from 2008 to 2012, “the drop-off in debt-funded auto purchases was particularly steep for student borrowers. In 2011, the two trends intersected and, by the fourth quarter of 2012, those student borrowers were actually less likely to hold auto debt than non-borrowers.”

25-year-olds with student debt are carrying a bigger burden, but people with no student loans in the same age group demonstrated a parallel contraction. “While average debt levels are considerably higher for student borrowers, with a peak of $35,559 in 2008 as compared with $19,748 for others,” the report said, “the trends in the two are strikingly similar.”

The decline in participation in non-student debt markets by those with a history of educational debt “may be driven the weakening labor markets since 2007,” the report said. Another factor could be changes in the access to credit.” In response to the recession and credit crunch, “lenders have tightened underwriting standards in all major consumer debt markets.

Consumers with substantial student debt may not be able to meet the stricter debt to income (DTI) ratio standards that are now being applied by lenders.” Repayment delinquency has also become more prevalent among student borrowers. A report by New York Fed economists Donghoon Lee and Wilbert van der Klaauw found that delinquent student borrowers are extremely unlikely to get new mortgages.

“As a result of tighter underwriting standards, higher delinquency rates, and lower credit scores, consumers with educational debt may have more limited access to housing and auto debt,” the report said, “despite their comparatively high earning potential.”

Also see: Mortage Delinquency Rate Drops

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