Stephanie O'Donnell-Peters isn’t exactly sure how much she and her husband owe on their student loan debt, but she estimated it’s around $125,000.
“We’re paying about $1,300 a month, plus our rent, plus other bills. If we didn’t have that we’d easily be able to save for a down payment.” As it is, O’Donnell-Peters said it could take another decade before she and her husband are able to own their own home.
A new study indicates that she’s not alone. Ballooning student loan debt is dampening young adults’ appetite for mortgages and car loans, potentially threatening the fragile recovery.
“Household formation ... might not pick up as fast as it would have otherwise because of student loan debt,” said Jed Kolko, chief economist at real estate website Trulia.com.
An economist and a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group found that, in a reversal of a long-term trend, 30-year-olds with student loans are now less likely to have mortgages and car loans than those without those debts.
Higher education, especially at the bachelor’s degree level and up, is linked to higher income. Young adults with student loan debt have typically been more likely to have mortgages and car loans because they could afford homes and new (or newer) cars.
The report said that since 2003, the percentage of 25-year-olds who carry student debt rose from 25 percent to 43 percent, and the average balance nearly doubled, reaching $20,326 in 2012. This burgeoning student loan debt could be crowding out the other investments young adults typically make.
After the recession hit, the number of 30-year-olds with mortgages — used as a proxy for home ownership by researchers because so few young adults have the means to buy their homes outright — plummeted, but the drop among those with student loan debt was steeper. And by last year, the rate at which student loan debtors held mortgages was about two percentage points lower than their peers without student loans.
The student debt dilemma “may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally,” senior economist and lead author Meta Brown wrote.
“The increase in student loan debt makes it harder for young people to become homeowners for two reason,” Kolko said. “It’s harder to qualify for a mortgage. ... Also, it’s harder to save for a down payment.”
O'Donnell-Peters said that’s the situation she and her husband are in today. Although she works two jobs and the couple is trying to save money, servicing their student loan debt is a significant chunk of their budget.
About $116,000 of their student loan debt is private student loans, which carry much less flexible repayment terms than federally backed ones. When they tried to work with their lender to consolidate or refinance, O’Donnell-Peters said the lender would only do so if her parents agreed to put up their house as collateral.
“If you have private student loans you’re really at the mercy of your lender if you’re struggling with your payment,” said Lauren Asher, president of The Institute for College Access and Success. “There’s a real need to provide meaningful relief for borrowers with private student loans ... to help prevent this kind of debt from having an effect in the future that economists suggest may be happening in the housing market.”
Brown and her co-author Sydnee Caldwell found that other sectors of the economy could be impacted, as well. After years in which 25-year-old student loan debtors were more likely to also have car loans than those without student loans, they found that the gap disappeared, then reversed.
“Having a lot of one kind of debt might affect your access to and willingness to take on other kinds of debt,” Asher said.
The poor job market, especially for young adults, also puts a damper on their ability to pay down debts and buy big-ticket items, said Richard Fry, a senior economist with the Pew Research Center. “What you generally see over the past decade is a sharp pullback in other forms of indebtedness,” he said.
In a recent Pew report, Fry found that the median household debt for those under 35 years old fell by 29 percent between 2007 and 2010, as compared to an 8 percent drop in the total debt of older Americans. This de-leveraging, though, didn’t happen equally; while the number of adults under 35 with mortgages, car loans and credit card debt all fell, the percentage carrying student loan debt rose.
“While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace,” Brown wrote.
For O’Donnell-Peters, it’s not about the economy: It’s personal. Buying a house is a pipe dream at this point, she said. “We talked about it in the past, but it’s kind of off the table right now,” she said.
“If I knew the cost of the private student loans, I probably would’ve just gotten the federal loans and paid the rest off as I went or taken a year off.”