American Debt Transitioning from Home and Auto to Education
While the number of young Americans with student loans is higher than it has ever been, the count of those with home and auto loans is on the steady decline.
A recent study from the Federal Reserve Bank of New York indicates that young student loan borrowers are retreating from both the housing and auto loan markets.
Methodology-wise, since only a small percentage of young homeowners actually own their homes or cars outright, the study looks at home-secured debt and auto debt (mortgages and car loans) as an indicator of home and car ownership among young people.
According to the study, historically those with student debt were more likely to have a mortgage by age 30. But things changed drastically when the recession hit. Homeownership among student loan borrowers fell by over 10%, and in 2012 dropped to nearly 2% less than for nonstudent debtors. In other words, contrary to historical patterns, now those with student loans are less likely to have a mortgage than those without student loans.
Similarly, pre-recession student loan borrowers were more likely to hold auto debt (again, debt being used as an indicator of ownership) than those without educational debt. But in the past several years that gap collapsed and student borrowers became less likely than those without student loans to hold auto debt.
While there is evidence that student loans are preventing – or at least delaying – college graduates from buying homes, there are other factors that could be causing this decrease in home and auto ownership among young student loan borrowers.
Opting to invest in people rather than property
Buying a home is traditionally seen an investment in a piece of property. But these stats seem to indicate a trend towards investment in human capital rather than land. After all, we know that education can pay off over time; average earned income increases significantly for bachelor’s degree holders, and is even higher for those with master’s degrees.
Opting for urban lifestyle
Studies show that living in a highly educated metro area boosts an individual’s earning power and leads to better employment opportunities, which means that many college graduates are flocking to urban centers like Washington D.C., San Francisco and Boston. These are notoriously expensive real estate markets with reliable public transportation, and for those reasons many college graduates are opting to do two things: rent rather than take on a mortgage and commute via public transportation rather than take out a car loan.
Opting to delay marriage
Research shows that women with outstanding student loan debt are less likely to get married than who graduated debt free. This could point to a trend of delaying major life decisions (marriage, children, homeownership) until financial stability is established.
In generations past there were several life events that marked the so-called entrance to adulthood. Buying that first car, taking out a mortgage for the first home, and getting married are all perceived as stepping-stones along the classic path to adulthood. But those stepping-stones might just be evolving.
Wondering how student loans might affect your ability to take out a mortgage? Check out this article on buying a home with student debt.