Is Student Loan Debt Really Preventing Homeownership?

Key Points:

Longer repayment terms and lower interest rates have increased students’ “education-buying power” and lowered payment-to-income ratios reducing the impact of rising student loan balances over time.
Millennials’ pursuit of higher education significantly boosts earning potential and house-buying power, making student loans more likely to delay rather than prevent homeownership.
Among millennials, those with a bachelor’s degree had approximately $250,000 more in house-buying power and a 12.8 percentage point higher homeownership rate in 2022 than those with only a high school diploma, highlighting the strong link between educational attainment and homeownership.

Student loans are frequently decried as an insurmountable barrier to homeownership for young home buyers. While it’s true that student loan debt levels are higher today than in previous decades, is it really preventing potential home buyers from purchasing a home? Analysis of data from the 2022 Survey of Consumer Finances (SCF) sheds light on key trends that help put the weight of student loan debt into perspective.

“With stable payment-to-income ratios and the substantial return on investment from higher education, millennials – the most educated generation yet – are well positioned to drive homeownership demand.”

Student Loan Debt Payment-to-Income Ratios Have Declined

The steady increase in student loan debt over the past three decades has brought the issue of student loan debt burden to the national forefront. The latest data reveals that average student loan balances have increased from $12,600 in 1992 to $40,600 in 2022, adjusted for inflation. While this increase is substantial, a deeper look reveals that the percentage of income that young households dedicate to student loan repayments each month has actually decreased in recent years. Between 2016 and 2022, the average payment-to-income ratio for families with heads of household aged 25 to 34 dropped from 7.4 to 5.9 percent.

So, how can overall debt levels be higher, yet the payment-to-income ratio be declining?
First, the average inflation-adjusted income for young households with student debt increased from $73,000 to $122,000 between 1992 and 2022 – an increase of nearly 70 percent. However, much like a mortgage, monthly student loan payments depend on more than just the loan amount and income of the borrower. The average loan repayment term has almost doubled from 7.5 years in 1992 to 13.9 years in 2022, lowering monthly payment-to-income ratios. Just as extending a mortgage term from 15 to 30 years allows home buyers to borrow more money for a similar monthly payment, almost doubling the student loan repayment term accommodates more debt for a similar monthly payment.

At the same time, student loan interest rates have declined. The average annual interest rate on student loans has declined by 2 percentage points, from nearly 8 percent in 1992 to right around 6 percent in 2022. Longer repayment terms and lower interest rates have increased “education-buying power,” while lowering payment-to-income ratios over time. Of course, it is important to consider whether the investment in higher education justifies the debt incurred.

Average loan terms and payment-to-income-ratio, graph

The Homeownership Return on Education

We know that higher educational attainment typically leads to higher household income, which in turn boosts house-buying power. Among millennials, for instance, the gap in house-buying power between those with a high school diploma (or some college/associate degree) and those with a bachelor’s degree was approximately $250,000 in 2022, adjusted for inflation, further underscoring the impact of higher educational attainment on earning power. This helps explain why, in 2022, the homeownership rate among millennials with a bachelor’s degree was 12.8 percentage points higher than for those with only a high school diploma, emphasizing the powerful connection between educational achievement and homeownership.

Home-buying power and Homeownership Rate of Millennials in 2022, Graph

Focusing on the increase of student loan debt levels overlooks the increase in education-buying power from longer loan repayment terms and lower student loan rates that frees up additional funds for young home buyers to put toward purchasing their first home. Based on our analysis, student loan debt more likely delays, rather than prevents homeownership. With stable payment-to-income ratios and the substantial return on investment from higher education, millennials – the most educated generation yet – are well positioned to drive homeownership demand, as more reach their prime home-buying years and continue to pursue the American Dream of homeownership.