For Millennials, there are two trends that have developed over the last few years. The amount of student debt is skyrocketing and the number of young homeowners is cratering. According to researchers, this may be related.
The issue all starts with the ballooning balance of student loans young people are taking on.
“From 2005 to 2015, outstanding student loan debt rose from $364 billion to $1.2 trillion, and the percentage of people aged 18 to 30 with a student loan increased from 27% to 40%,” wrote researchers Yuliya Demyanyk and Daniel Kolliner.
“Even after total consumer debt started to decline during the Great Recession, student loan debt steadily increased at an average quarterly rate of 3.2%. The sharp rise in student loan debt has raised concerns that young people with a lot of student debt may be having trouble getting a mortgage or other types of loans”
This expansion in student debt has also coincided with a decrease in the number of people aged 18-30 holding a mortgage from 11% in 2005 to 7% this year.
Part of the issue, said the researchers, is that those with student debt are being evaluated differently when they apply for mortgages to buy a home.
“A major constraint for getting a loan can be how much debt a person already has,” said the study. “Lenders calculate the ratio of a borrower’s debt payments to his or her income and consider this number, called the debt burden, when they decide whether a borrower can take on more debt.”
According to Demyanyk and Kolliner, student debt repayment for young people is taking up about 20% of income. This makes getting a home incredibly difficult since a mortgage can eat up 30-45% of income.
So while the number of young people that have mortgages has decreased, those with student loans have felt it even more so. The researchers said the two are probably connected:
“There was a sharp decline in the per cent of young borrowers with a student loan who had a mortgage in 2009, compared to the milder decline for those without a student loan This sharp decline coincides with the increased share of young borrowers who have a student loan. A plausible explanation for this larger decline in mortgage borrowing could be that banks would no longer lend to these borrowers, or that young borrowers with a student loan could not afford a mortgage.”
Demyanyk and Kolliner did say that the decline is probably not totally caused by college debt, but there was certainly some influence. And with the number of student loans expected to continue rising, the researchers don’t think the mortgage trend will turn around.
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