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The Impact of Student Loans on Millennial Homebuyers

home prices

home pricesAccording to many reports, student loan debt is a significant hurdle for millennials when buying a home. But new numbers from the First American Economic Center [1] contradicts those findings, showing that student loan debt is more likely to delay the timing of homeownership, but it’s not necessarily a deal breaker. To examine the impact of student loan debt on house-buying power, the report looked into the median household income of a prospective first-time home buyer, who is, by definition, a renter. “Renter’s house-buying power is based on the prevailing 30-year, fixed mortgage rate (4.64 percent in January), and assumes a 5 percent down payment and that one-third of pre-tax income is used for the mortgage,” the report reads.

The average student loan debt for those that complete their bachelor’s degree is approximately $30,000. Based on a 6 percent Federal direct student loan interest rate, the average monthly payment is just above $300 per month, or nearly $4,000 per year. The report pointed out that this reduces median household income for those that complete their bachelor’s degree and, therefore, reduces house-buying power by $23,000 to $323,603. While the reduction in house-buying power is not ideal, renter house-buying power for those with a bachelor’s degree is still more than $120,000 greater than renters with just a high school education.

So, how does higher house-buying power influence home buying? Quoting the latest available household census data in 2017, First American [2] stated that homeownership rates for those with a bachelor’s degree are nearly 8 percent higher than those with a high school degree. This difference becomes more exaggerated when comparing those with a college degree to those who do not complete high school—nearly a 25 percent difference in homeownership rates.

In short, education pays off when it comes to home buying power. Nine out of 10 millennials say their college education was worthwhile and have already paid off their debt or will in the future. Student-debt adds up, but higher education leads to higher income wherein the increase in income attributable to higher education far outweighs the impact of student loan debt. Although the price of college is high, in the end game not going to college may cost more.

Read the full report here. [3]