DS News has covered the issue of student loan debt and the negative impact on millennials’ economic mobility and the ability to move forward toward homeownership, but what if student loan debt could actually be beneficial to making that homebuying decision? A recent study from CoreLogic suggests that student loan debt may actually help millennials’ creditworthiness.
CoreLogic reports on the effects of student loan debt on millennial renters (specifically those 20-34 years old) by using the CoreLogic Rental Property Solutions’ tenant screening score from ScorePLUS. This tool measures the likelihood of lease default in next 12-18 months at the time of rental application. It uses the applicant’s credit history from credit bureaus as well as specific rental application characteristics. The score is scaled in the range of 200-800 with a higher score indicating better credit quality.
The study compared renters’ ScorePLUS scores with different amount of student loan debt. It was found that in both 2010 and 2015, millennial applicants who had higher student loan debt earned higher average ScorePLUS scores than those who had a lower amount of student loan debt.
This trend also rang true for renters’ FICO scores which shows that applicants who carried higher student loan debt had higher FICO scores, on average. Therefore, student loan debt did not prevent millennials from access to credit despite the fact that it may delay their decision to purchase a home.
"Student loans are typically categorized as installment loans and are factored into the calculation of the FICO Score along with other types of installment loans such as mortgages and auto loans and with revolving accounts such as credit cards," said Can Arkali, Principal Scientist, FICO Scores. "In this context, student loans are treated very much like any other installment loan. The precise impact of student loan debt will depend on the other information found on the credit bureau file. It's important to note that while student loan debt can factor into the FICO Score, credit card debt typically has a larger influence. Ultimately, what counts the most isn’t necessarily whether the consumer has student loan debt, but whether the consumer is consistently paying all credit obligations including student loans on time."
CoreLogic also compared the average ScorePLUS score for millennial applicants with student debt and without student loan debt. The results showed that from 2009 to 2015, the millennial applicants with student loan debt did have higher ScorePLUS scores than those without student loan debt. It is noted that applicants with student loan debt generally held college degrees correlating with these applicants having higher scores, on average, than those who did not have a college degree. It was shown though that the score gap between the two groups has become smaller in recent years.
All this to say that despite the fact that student loan debt has grown into the nation’s second largest consumer debt, coming in right behind mortgage at number one, and has created a significant financial burden for millennials, this report shows that it does not appear to prevent millennials from accessing credit; a beneficial factor for later home buying decisions.
"Consumers with student loan debt can certainly get good FICO Scores which would in return help them get access to credit," said Arkali. "The key aspect here isn’t necessarily the presence of student loan debt, but it is the consumer’s track record of responsible management of credit across all obligations including student loans. As such, as long as consumers consistently pay all of their obligations on time, keep their revolving debt to a minimum and judiciously apply for new credit, they can attain good FICO Scores and gain access to credit."