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Does Student Debt Affect Your Chances at Homeownership?

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Jennifer RinerBy Jennifer Riner of Zillow

Zillow recently determined first-time home buyers are renting longer than ever, up 6 years compared to 4.4 years in the late 1980s. And, the typical first-time home buyer is now 33 years old compared to 30 years old just a few decades ago. This delay in buying homes between Gen X and Gen Y has a lot of economists speculating – why the wait?

One theory behind millennials’ decision to postpone buying starter homes, further than any other generation in history, is high student loan debt. Currently, roughly 40 million Americans owe more than $1.2 trillion in combined student loan bills. Because monthly student loan dues interfere with the ability to save for a down payment – and missed payments hurt credits scores, negatively affecting borrowers’ ability to apply for mortgages – individuals with student loan debt might be hesitant to run out and house hunt as quickly. Or, it could just be another ever-changing facet of the real estate market, which is constantly shifting and growing over the decades.

Graduation Level and Homeownership Rates

Homeownership Sensitivity to Student Loans

Source: Zillow Research

By assuming a 33-year-old, married couple with children and an average income, Zillow analyzed the 2013 Panel Study of Income Dynamics across all degrees, including associate, bachelor’s, master’s and doctorate. Households with medical, law and doctoral degrees hold a 70-percent chance of owning a home. Those with master’s degrees hold a 66 percent chance of owning a home, while those with bachelor’s degrees get a 61 percent chance. Associate degree graduates have a 56 percent chance of owning a home. However, those who don’t graduate hold just a 30 percent chance of owning a home, which is even lower if they took out student loans during their time in college.

Unfortunately for those who took out student loans and didn’t graduate, they actually lost money on their investment. Unless they were able to salvage their credits and plan to graduate at a later date, or they can somehow use their classes for resume building, the money spent is less likely to benefit them in the future in terms of career development, and may also impact their ability to save for a home due to an inherently lower income – not necessarily because they are paying off their debts.

Education and Debt Relationship

Assume again the same family with at least one master’s degree between the couple and no student debt has a predicted probability of homeownership of 80 percent. Assume now the couple has $50,000 in student debt. Their predicted probability of homeownership falls by only 5 percentage points, to 75 percent, when their debt level is that high.

When households with a doctorate or bachelor’s degree have $50,000 in debt, they face similar declines in homeownership – fairly minimal. However, the probability for homeownership in households with at least one associate degree who have $50,000 in debt (also a couple of 33-year-olds with kids) drops a whopping 16 percentage points. For households with no degree and $50,000 in debt, homeownership likelihood drops 15 percentage points. The divergence between 2- and 4-year degrees, and the relationship between debt and homeownership, is much stronger than speculation of an entirely apprehensive Generation Y.

Key takeaway? Just because you’re paying off student loans, doesn’t mean you can’t be financially stable, first-time home buyer in the near future. Is it a good idea to pay off your debts before investing in real estate? That widely depends on your student loan fees, how much you pay in rent, the projected home value increases in your city, your financial portfolio and investment goals, among other factors.

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