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Student Debt Is a Major Reason Millennials Aren't Buying Homes

New York Fed economists blame student debt for homeownership woes

College tuition hikes and the resulting increase in student debt burdens in recent years have caused a significant drop in homeownership among young Americans, according to new research by the Federal Reserve Bank of New York.

The study is the first to quantify the impact of the recent and significant rise in college-related borrowing—student debt has doubled since 2009 to more than $1.4 trillion—on the decline in homeownership among Americans ages 28 to 30. The news has negative implications for local economies where debt loads have swelled and workers' paychecks aren't big enough to counter the impact. Homebuying typically leads to additional spending—on furniture, and gardening equipment, and repairs—so the drop is likely affecting the economy in other ways.

As much as 35 percent of the decline in young American homeownership from 2007 to 2015 is due to higher student debt loads, the researchers estimate. The study looked at all 28- to 30-year-olds, regardless of whether they pursued higher education, suggesting that the fall in homeownership among college-goers is likely even greater (close to half of young Americans never attend college).

Had tuition stayed at 2001 levels, the New York Fed paper suggests, about 360,000 additional young Americans would've owned a home in 2015, bringing the total to roughly 2.9 million 28- to 30-year-old homeowners. The estimate doesn't include younger or older millennials, who presumably have also been affected by rising tuition and greater student debt levels.

There's a good chance the number of millennials kept from buying homes because of their student loans has only grown since the period the economists studied. As tuition has risen, total student debt has increased 13 percent, and every new class graduates with more student debt than the preceding one.

The consequences could reverberate for decades as more young Americans are locked out of purchasing property, the primary way that U.S. households build wealth. With less wealth, millennials could cut their spending as they attempt to build up their net worth. The U.S. economy has historically depended on household spending for roughly 70 percent of its growth. 

The negative impact of heavier student debt burdens represents the flip side of the view that more education, regardless of its cost, benefits the U.S. While today's 25- to 34-year-olds are more highly educated than their predecessors, that's because the federal government has plowed nearly $1 trillion in loans, grants, and tax credits to college students since 2010.

The New York Fed and outside economists based their estimate on an analysis of how public college tuition increases from 2001 to 2009 swelled student debt held by 24-year-olds from 2003 to 2011, and eventually impacted homebuying among 28- to 30-year-olds from 2007 through 2015. They found that bigger tuition bills didn't deter young Americans from going to college; instead, they simply borrowed more, with virtually no impact on college enrollment. At a minimum, the tuition raises alone were responsible for 11 percent of the decline in homeownership among all young Americans.

"States that increase the cost of education therefore may pay a price not in the form of declining workforce skill, but instead through muted housing-related spending and lower wealth accumulation among younger consumers in the years to come," the New York Fed paper states. States that hike tuition the most can expect weaker housing markets and more adult children living with mom and dad in future years.

It's a scenario the U.S. Treasury Department, the Federal Reserve in Washington, financial regulators, and prominent bank chief executives have been warning about since at least 2013.

Previous research, particularly by the New York Fed, had suggested an association between rising student debt loads and lower homeownership. But those findings had been criticized by Obama White House economists, academics, and others who either said there was no causal link, or if there was one it was "at most, a small fraction of the decline," and that college would help most people afford homes and feed the economy.

In fact, most recent college students are struggling with their loans, according to the New York Fed. More than half of students who left college in 2009 had either defaulted, missed at least four months of required payments, or were facing higher loan balances five years later.

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