Does Student Loan Debt Hinder Millennial Homeownership?

Student loans: Can’t live with ’em, can’t get a college degree without ‘em. At least, that’s the case for most of us.

Despite all the negativity surrounding the subject of student loan debt, the general consensus is that it’s better to have a degree than not have one – even if you have to contend with loans in order to afford it. After all, the typical college grad enjoys higher earning potential and lower unemployment than those without a degree.

But clearly there are negative aspects to shouldering student loan debt. One big example? The potential impact on your ability to buy a home – a topic that’s inspired its fair share of headlines this past year. Since saving for a down payment is often the biggest hurdle to homeownership, young people with large student loan payments are obviously at a disadvantage.

Which begs the question: When it comes to buying a home, is it better to have a college degree and its associated student loans – or are you better off with no degree and no loans? That’s one of the questions that Trulia Housing Economist Ralph McLaughlin set out to answer with his recent analysis on how student loans impact saving for a down payment.

I sat down with Ralph to find out more about what he learned, what surprised him about the research, and what millennials should take away from the findings.

Dan Macklin (DM): This analysis is really interesting – what was the catalyst for doing the study?

Ralph McLaughlin (RM): There’s been a lot of discussion and debate recently about how rising student loan debt impacts household budgets and the housing market in general by making it harder for people to buy homes. In order to shed some light on this subject, we wanted to find out how student loans really affect young people who might be thinking about saving for a home.

DM: How does your research go about answering that question?

RM: We compared two hypothetical groups – people with college degrees, who have higher earning potential but also an average amount of student loans; and people without college degrees, who have lower earning potential but no student debt. Using median incomes for households with and without degrees, we calculated each group’s ability to save for a down payment in each of the largest 100 metropolitan areas.

DM: What makes this study different from the other research out there on this subject?

RM: We came up with a new approach to measuring how long it should take to save for a down payment. The old approach simply took 20% of the median home price in any given area, assumed you saved 10% of your monthly income and provided a rough calculation for how long it would take to hit that goal.

However, the reality is that while you’re saving for that home, two things are happening. First, your household income is going up – and the rate at which it increases is affected by the level of education. And second, homes are getting more expensive. In order to do an accurate analysis, you need to take both of these factors into account, which is exactly what we did.

DM: Were you surprised by any of the findings?

RM: Well, like a lot of people out there, I thought that having a college degree would be better across the board in terms of helping people save for a home, given the higher earning potential of a degree-holder. But we found that in 30 of the 100 largest metropolitan markets, it’s actually faster to save for a down payment if you don’t have a degree/student loans. In a few markets, like Las Vegas, Columbia, S.C., and El Paso, TX, millennial households without a college degree can save for a down payment at least a year and a half faster than those with a degree. 

DM: So does that mean it’s better for young people in those areas to skip the college degree?

RM: That’s a bit of a stretch. What we’re saying is that if you’re between 25-30 and you want to save for a home, you might be able to save faster without a college degree in certain metropolitan areas. However, in the long run, having a college degree is still better because you’ll be able to afford a more expensive home eventually (both in terms of saving for a down payment and making payments on a higher mortgage loan). It just might take you longer to buy your first home because student loans are hindering your ability to save.

And remember that it’s still faster to save with a college degree in two-thirds of major metropolitan areas. In particular, prospective homebuyers in California should be able to save faster with a degree than without one. In markets like San Francisco, Los Angeles and Orange County, it can take upwards of 18 years for a degree-holder to save for 20% down – but for non-degree holders, it can take between 32 and 50+ years.

DM: You talk about putting 10% down as a strategy for getting into a home sooner – what are your thoughts on that?

RM: A 10% down payment is certainly an option. The downside is that you’ll have a higher loan balance, higher monthly payments and will pay more interest in the long run. But if you live in a market like San Francisco, where it takes 29 years for degree-holders to save for a 20% down payment, putting less down in order to get into a house faster may be attractive. In fact, in San Francisco and a few other markets in California and the east coast, it can take more than twice as long to save for a 20% vs. 10% down payment. It all depends on how quickly home prices are climbing.

DM: Final question – what’s your favorite housing market to watch?

RM: It’s always interesting to monitor what’s going on here in California, not just because Trulia is located here, but also the state has historically experienced pretty tight inventory. While housing construction is starting to come back, inventory remains tight in some markets. So the question is, at what point are increasing prices going to self-moderate because they’re less affordable to the general homebuyer?

I’m also watching spillover markets from the Bay Area – tech hubs that are not located in California, such as Portland, Seattle, Denver, Austin, and outside of Boston. These markets have a large percentage of employment in the tech industry, so if prices keep going up in the traditional tech hubs of San Francisco and San Jose, there could be spillover effects as employees want to relocate to these markets where housing prices are more reasonable.

Ralph McLaughlin is a Housing Economist at Trulia and conducts research on housing market trends and real estate search patterns. His educational background includes a B.S. in Regional Development from the University of Arizona and a Ph.D. in Planning, Policy, and Design from the University of California at Irvine (with a specialization in Urban Development). He has more than a dozen publications and research papers in the fields of housing economics, land use and housing policy, and industrial geography, and was previously Director of the Certificate in Real Estate Development at San Jose State University.

Download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.