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Economists Study the Effect of Student Debt on Access to Homeownership

The rising level of student debt and the relatively high default rates for student loans have raised concerns about the impact on future home ownership among student borrowers. Federal Reserve Board Economists Dr. Daniel Ringo and Dr. Alvaro Mezza recently presented the results of a paper estimating the impact of an increase in student debt on home ownership.

Making sense of the story:

  • A 10 percent increase in student loan debt decreases the home ownership rate by one to two percentage points 24 months out of school.

  • In terms of numbers, a 10 percent increase in tuition fee (which is associated with student debt) reduces the number of potential homeowners by 280 individuals per 10,000 college goers two years after exiting school, which is equivalent to 170 individuals per 10,000 individuals.

  • A 10 percent increase in student loan debt causes a 0.6 percentage point increase in the probability that the borrower falls into the subprime category (credit score of 620 or less) and a 0.8 percentage point increase in the probability that a borrower falls into deeply subprime.

  • A 10 percent increase in debt is associated with a 0.7 percentage points increase in delinquency rates.

The authors did not find conclusive evidence that an increase in student loans leads to a lower

mortgage balance.

Notably, an increase of 10 percent in student debt only delays the home purchase rate of a given

cohort by about three months, based on the authors’ estimates.

The authors caution that tighter credit underwriting standards after 2005 suggest that the drag of student debt on home ownership may be greater, with lenders more sensitive to debt-to-income and loan-to-value ratios. - Source: NAR

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