Starting from census data showing a drop of 8.8 percentage points in homeownership among that age cohort, the Fed’s researchers estimate that rising student loan balances account for roughly 2 percentage points of that drop, or nearly a quarter of it.
“While investing in postsecondary education continues to yield, on average, positive and substantial returns, burdensome student loan debt levels may be lessening these benefits,” the researchers conclude. “As policymakers evaluate ways to aid student borrowers, they may wish to consider policies that reduce the cost of tuition, such as greater state government investment in public institutions.”
From 1989 to 2016, the share of American families of all ages with an outstanding student loan balance rose from 8.9 percent to 22.4 percent, according to the Fed’s Survey of Consumer Finances. The median family with student loan debt now owes $19,000 on those loans, according to the survey, up from a median balance of just $5,600 in 2016 dollars in 1989.
While the Fed’s latest report focuses on young families, those headed by older adults are also experiencing rising student loan burdens. Thirty-four percent of families headed by someone between 35 and 44 have outstanding student loan balances, as do 24 percent of families headed by people in their 40s and 50s. Student loan indebtedness is now just as prevalent among these middle-aged Americans as it was among 18- to 34-year-olds in 1998.
If those trends continue, in just a few years people with student loan debt will account for a majority of households headed by someone under the age of 25. And as that generation continues to age, many will carry their debt with them, some well into retirement: In 2016, for instance, 3.6 percent of Americans age 65 to 74 were still paying off a student loan, up from 0.6 percent as recently as 2001.
The Fed’s researchers write that in forthcoming work they’ll be looking at the effect of student loan debt not just on homeownership but on access to credit overall. The preliminary data they have shows that “higher student loan debt early in life leads to a lower credit score later in life,” which “has implications well beyond homeownership, as credit scores impact consumers’ access to and cost of nearly all kinds of credit, including auto loans and credit cards.”
Data compiled by Mark J. Perry of the American Enterprise Institute illustrates the proximate cause of skyrocketing student loan debt: The cost of higher education has risen much faster than the cost of just about everything else. The price of college tuition has risen by 183 percent since 1998, more than three times faster than overall inflation since then.
One reason for rising college costs is that policymakers at the state level have slashed funding for higher education in recent decades. In 18 states, taxpayers spend more on jails and prisons than they do on colleges and universities, according to a 2016 Department of Education report.
Overall the return on investment to higher education remains quite good: A person with a bachelor’s degree can expect to earn about half a million dollars more over their lifetime than a similarly situated individual with only a high school diploma, according to a 2015 report by the Social Security Administration.
But the rising price of tuition is gnawing away at that earnings advantage, and the Fed’s latest report clearly illustrates what the downstream effects of those high college costs are: a rising debt load that’s making it harder for young Americans to do things, such as buying a home, that previous generations took for granted.