Many college graduates face a mountain of student debt after graduation, delaying major life events.
Student debt has become a key topic in the political debates of late. Many worry that student loans are a drag on the economy, forcing young people to delay major life events such as marriage and homeownership. Many point to analyses from the Federal Reserve Bank of New York to support these theories, but there is a slight flaw in the data.
Data From the NY Federal Reserve Bank
In 2013, the Federal Reserve Bank of New York released the following graph, which many have cited as evidence that, after the Great Recession, those with a higher education accompanied by student loan debt were less likely to own a home than those without a higher education or student loan debt. The visual is a striking admonition to the burdens of student loan debt. The problem is that the information is misleading; the data contains zero information about education.
Lumped together with “no student loan debt” are people who went to college who did not borrow, and people who never went to college. The composition of both of these groups is changing over time.
The Haves and Have-Nots
A more appropriate study, performed by Susan Dynarskly, a senior fellow with the Brookings Institute and a University of Michigan economics professor, further breaks down the data into three groups: (1) those who went to college and accumulated student loan debt, (2) those who went to college and did not borrow, and (3) those who never went to college. The full analysis can be found in her study, “The Haves and Have-Nots in Homeownership: It’s Education, Not Student Debt.”
Before the Great Recession, Dynarskly finds that 35% of young people with a college education and no student debt owned a home, compared to only 23% of those without an education. In the aftermath of the housing market collapse, homeownership dropped for both groups. The drop was more severe for the college-educated crowd, but they started off much higher as well.
The Great Divide
The next graph is important because it delves deeper into the data, tracking how homeownership rates evolve over the life cycle. For those in their early twenties, those who did not attend college are more likely to own a home. Logically, this makes sense as they have likely been working since high school and are beginning to settle down, whereas their college-educated counterparts are just entering the labor force.
The college-educated catch up fast, though, and have higher rates of homeownership by age 27. Those who borrow for college do have a slower start to homeownership than those who went to college debt-free. Obviously, student loan payments add to their monthly debt-to-income ratio, requiring more time to save for a down payment and/or qualify for a home loan.
By the time people are in their 30s, however, those with student loan debt are about on par with their debt-free college-educated cohorts. But there is a strikingly large gap between those who went to college (with or without debt) and those who did not.
The fact is, college education usually leads to a higher paying career. Men with a BA earn about $35,000 more per year than those without, and women with a BA earn about $25,000 more. Meanwhile, the inflation-adjusted earning of those with no college experience has been dropping since 1979. The typical undergraduate borrower with a BA has an average debt of $30,000, and pays about $4,200 a year to college debt service. This burden of student debt is dwarfed by the differences in earnings between those with and without a college education.
According to Dynarskly, “the college-educated—even those with student debt—are winners in our economy.”