We hear it all the time. The burden of enlightenment, student loan debt, is preventing people from becoming homeowners. Housing and Urban Development (HUD) Secretary Castro, at a recent National Association of Realtors (NAR) event, claimed that student loan debt is the main obstacle preventing millennials from buying a home.

  • Is a degree worth it? Yes, the average increase in annual earnings from having a college degree would pay off the average student loan to achieve that degree in less than three years.
  • Three quarters of student loan debt holders within the age range of most first-time homebuyers have a monthly payment of less than $400. Yet, they earn more than $750 a month because of their education.
  • They have $350 more to spend on housing than they would if they hadn’t gone to college.

We hear it all the time. The burden of enlightenment, student loan debt, is preventing people from becoming homeowners. Housing and Urban Development (HUD) Secretary Castro, at a recent National Association of Realtors (NAR) event, claimed that student loan debt is the main obstacle preventing millennials from buying a home.

To support his position, Secretary Castro cited the number of individuals in the U.S. with student loan debt is 40 million. He also highlighted that 70 percent of students graduate with debt, and the average amount of student debt has increased 56 percent in the decade between 2004 and 2014.

Even Larry Summers, former Treasury Secretary, and Joseph Stiglitz, a Nobel laureate in economics, have linked the rise in student loan debt to limited demand for homeownership.

Those advocating ballooning student debt levels as the scourge of homebuying demand point to a dizzying array of data.

According to a survey conducted by the NAR and the nonprofit American Student Assistance, 71 percent of people who are repaying their student loans reported that the burden of repayment is delaying them from buying a home. Survey respondents indicated that delay may be more than five years.

A study conducted by the Pew Research Center identifies adults between the ages of 18 and 34 are more likely to live with their parents than maintain any other living arrangements, including being a homeowner.

Data from the Federal Reserve Bank of New York lists the nation’s “burden of enlightenment” at an all-time high of $1.2 trillion. The homeownership rate for those 35 and younger has declined from 44 percent at the housing boom peak to 34 percent today.

Just a quick Google search for “student loan debt preventing homeownership” yields thousands of results.

The obvious conclusion? Student loan debt is a barrier to entry into homeownership

Yet, this is not the end of the story. Brookings Institute research from 2014, using the most recent Federal Reserve Survey of Consumer Finance (SCF), finds that one-fourth of the increase in student debt over the last quarter-century has been from the increase in the amount of people pursuing and earning graduate and professional degrees.

Logically, it takes more time and more money to earn a graduate degree. During the same time frame, the average amount borrowed for those graduate degrees increased 400 percent to more than $40,000, while the amount borrowed for bachelor’s degrees only increased by 166 percent to $16,000.

But, is it worth it to borrow $16,000 for the income benefits of earning a college degree? The Brookings research goes on to find that the increased earning power derived from having the education ($7,400 annually) would pay for the debt borrowed to earn a bachelor’s degree in less than three years.

Is that an insurmountable burden for the privilege of enlightenment?

Many experts point to a looming crisis caused by the total balance borrowed. But, it is more telling to look at the burden of the payment.

Let’s look closely at the monthly student debt payment relative to income, which is a critical factor in determining whether homeownership is burdened.

Surprisingly, it has remained about the same or even decreased in recent years.

Between 1992 and 2010, the median borrower spent between 3 percent to 4 percent of their income on student debt payments.

Over the same period, the average borrower’s student debt burden actually fell from 15 percent to 7 percent.

Several factors have prevented the student loan payment burden from increasing (Figure 1), including increased length of student loan terms, lower student loan interest rates and the benefit of higher income from education.

So, in reality, the burden of paying off student loan debt is not dramatically higher today than in decades past.


More recently, the Federal Reserve Bank of Cleveland refined and updated this research by determining the monthly debt burden for borrowers between the ages of 20 and 30.

Although the average student loan balance was $29,000, the average payment for 20- to 30- year-olds on those loans in the second quarter of 2015 was $351.

The research also points out that three quarters of all 20- to 30-year-old borrowers have a student loan payment of $400 or less. If the extra earnings per month of having the college degree ($750) is higher than their loan payment, then they are materially better off.

What does the extra burden from paying off student debt mean for housing affordability?

According to National Association of Colleges and Employers, the average annual income of an American who graduated in 2016 with a bachelor’s degree is $50,219. This equates to a monthly income of $4,185.

Compared to a monthly student loan payment of $351, the pre-tax burden is 8.3 percent. Additionally, student loan interest is tax deductible, which can further help reduce the real burden of paying for college.

Let’s take this scenario even further. If the average college graduate wanted to buy a house with a 30-year, fixed-rate mortgage at the current mortgage rate, about 3.5 percent today, how much could they borrow — both with and without student loan payments?

The Federal Housing Administration (FHA) is the largest provider of mortgage credit to first-time homebuyers.

According to current FHA guidelines, the combined monthly payment to cover a home loan’s principal, interest, property taxes, homeowner’s and mortgage insurance (home-related debt and expenses) on a loan with a low down payment should not exceed 31 percent of one’s monthly income.

Based on this limit, one would be able to borrow $191,100, with or without the average student loan payment. That’s right, the existence of the student debt payment has no impact on how much house one can afford.

(Calculations include $250 per month for real estate taxes, $125 per month for homeowner’s insurance, $80 per month for mortgage insurance and no other debt obligations.)

That’s because the addition of $351 of monthly student debt payments only increases the total amount of all monthly debt obligations, home-related and any other, to 39 percent, which is below the qualified mortgage ability to repay limit of 43 percent that applies to home-related debt and expenses as well as any other debt obligations.

In fact, even the addition of a student payment of $400 to the total of the mortgage-related expenses would be under 43 percent of monthly income. Perhaps the burden of enlightenment does not encroach on affordability after all.

Of course, an individual’s financial circumstances can vary. Not everyone earns the average income; some may have additional debt obligations, and depending on where one lives, one may need a much more significant down payment to buy a first home.

But, these barriers to entry are not caused by the existence of student loan debt.

So, why are student loans seen as such a barrier to homeownership?

Many college graduates settle and move back in with their parents, believing that the size of their debt prevents them from living on their own.

However, many overlook that with down payment requirements at a low of 3 percent and affordable student loan payment plans, the benefits of greater income offset the burden of their student loan payment.

In other words, their student loan debt does not encroach upon their house-buying power. If you sit down and do the math, homeownership is within reach.

Does the burden of enlightenment really prevent homeownership? The math suggests that for many it does not.

Mark Fleming, Ph.D. is the chief economist at First American Financial Corporation in Washington, D.C. You can follow him on Twitter at @mflemingecon or on LinkedIn.

Email Mark Fleming

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