How Student Debt Holds You Back

People with student loans are less likely to buy a house than those without loans Photograph by Patrick T. Fallon/Bloomberg

Paying for college has long been seen as a good investment because college graduates fare better on the job market than people with just a high school degree.  New research by the Federal Reserve Bank of New York, though, shows that the payoff is diminished for students who go into debt to finance their educations.

Before the recession, 30-year-olds with student debt were more likely to have car loans and mortgages than their peers who didn’t have education loans. This made sense because, as the New York Fed explains, “Student debt holders have higher levels of education on average and, hence, higher incomes.” By 2008, those with student loans were 14 percent more likely to own a home.

Then, as the market crashed, things changed. Homeownership of all 30-year-olds started falling, but even more so for student borrowers. At some point in 2011, the paths crossed, and people without education debt became more likely to have a mortgage than those with student loans. This period coincided with a big increase in student debt, which has risen 66 percent from 2008 to 2012. As the researchers sum it up: “By 2012, the homeownership rate for student debtors was almost 2 percentage points lower than that of nonstudent debtors.” The same pattern holds for auto loans, the study finds.

The likelihood of this trend reversing is hampered by another troubling finding. Student borrowers tend to have much lower credit scores than those without student loans. “In 2012, the average score for twenty-five-year-old nonborrowers is 15 points above that for student borrowers, and the average score for thirty-year-old nonborrowers is 24 points above that for student borrowers,” the researchers found. Particularly in today’s tight lending markets, that can make it difficult for the growing number of student borrowers to borrow in the future.

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