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Acceleration in Student Loan Debt Could Block Millions From Homeownership

·7 min read
  • Almost one-in-10 likely student loan borrowers on an income-based repayment plan have less than 28% of their monthly income left over to cover housing costs, disqualifying them for most mortgages.

  • Half of renters and 39% of buyers delayed their decision to buy a house as a result of student debt, according to a Zillow survey.

Mounting student debt risks putting many would-be homebuyers — particularly buyers of color — very close to or over conventional debt-to-income ratios, disqualifying them from homeownership even before they've applied for a mortgage.

In-state tuition and fees at public universities increased from $6,189 in 2007 to $11,260 in 2020, according to U.S. News & World Report, an increase of 81.9% — and many students are increasingly reliant on student loans to help shoulder the rising costs. In 2007, student debt amounted to just 4.4% of total household debt. By 2020, that had more than doubled to 10.7%, a 143% increase over the span of 13 years that far outpaces in-state tuition hikes. And as student debt burdens grew, homeownership rates among 28-34 year-olds who attended college declined, falling from 60% in 2007 to 49% in 2019. Zillow survey data from 2019 found that half of renters and 39% of buyers delayed their decision to buy a home as a result of student debt.

There are almost 43 million borrowers nationwide owing around $1.6 trillion in federal student loans. As lawmakers continue to debate the topic of student loan forgiveness, one idea floated calls to eliminate $10,000 worth of debt to help ease income burdens for borrowers, bringing the typical student debt owed down to about $25,000.

The debt-to-income ratio (DTI) represents the amount of monthly debt obligations a borrower has relative to their overall income, and just like any other debt, student loans are considered by lenders as part of a DTI calculation that helps determine their capacity to take on additional mortgage debt. Zillow estimated that a $10,000 reduction in the typical student loan burden could potentially allow about 1 million likely student borrowers (those on a standard 10-year repayment track) to more comfortably afford a monthly mortgage payment while adhering to customary DTI thresholds. An additional 171,000 likely student borrowers on an income-based repayment plan could also move within reach of affording homeownership under this scenario.

A Hard Constraint

Credit scores that are rising in tandem with tuition costs and student debt levels suggest that borrowers are finding ways to make ends meet, likely on the back of rising incomes. But debt levels can only get so high before they begin taking a toll on borrowers — especially those borrowers set to take on even more debt in order to purchase a home. At some point, there is no more wiggle room in a household's budget, and finances are pushed up against the hard constraint of debt-to-income ratios.

The DTI math is fairly straightforward: If a borrower has monthly income of $5,000, and their monthly debt obligations (credit card bills, car payments, student debt etc.) total $1,000, then their DTI is 20% ($1,000 monthly debt payment is 20% of $5,000 in total income). In most cases, the highest DTI a borrower can have and still obtain a qualified mortgage is 43% for loans underwritten by the Federal Housing Administration, or 36% for many conventional mortgages.

But the 43% and 36% levels reflect total debt, including pending mortgage debt — and because a mortgage is generally the single-largest loan most people will apply for, mortgage debt understandably is a huge component of overall DTI. The highest allowable DTI for mortgage-related costs alone (including principal, interest, home insurance, property taxes and private mortgage insurance payments where applicable) is 31% for a FHA loan and 28% for a conventional loan. So as student debt grows and represents a larger share of households' total debt, the amount of leftover wiggle room to add in substantial mortgage debt and still stay within acceptable DTI standards shrinks.

Not Making it Work

Consider a prospective home buyer that attended college, is within their prime home-buying age and is likely repaying college loans. Assume their young household earns the 2019 median income for prospective buyers of $60,000, and is responsible for the average 2019 total student debt of $35,205 (Note: The $35,205 average student debt burden in 2019 is very close to the $36,178 total of four years of in-state tuition from 2012-2015, according to U.S. News). If the household repays this debt over 10 years at the July 2019-June 2020 average 4.5% federal interest rate for undergraduate borrowers (likely a conservative assumption, since a large portion of student debt is held by private lenders at higher rates), their monthly payment would be $364.86. With $5,000 in monthly income, this household's standing DTI — from student debt alone — is 7.3%.

If that household purchases the typical $272,446 U.S. home with a minimal 3.5% down payment and applies for a 30-year, fixed-rate mortgage at the current interest rate of 3.17%, their monthly mortgage payment would be $1,132.69. Combined, this borrower's mortgage and student debt load would be $1,497.55, or 30% of their monthly income. That leaves them with just $300/month in breathing room to take on additional debts without exceeding the 36% conventional loan DTI threshold — not enough, for example, to afford the typical used car payment of $397 per month.

Almost one-in-10 (9%) likely student borrowers on an income-based repayment schedule have such high student loan burdens that they fall out of the standard DTI housing threshold. That number leaps to more than 50 percent for those on the standard 10-year repayment track. For Black and Latinx households, the impact is even greater. More than two-thirds (68.7%) of Black households and a majority of Latinx households (52.6%) who are likely student loan borrowers likely spend more than 28% of their monthly income on housing. Assuming their current housing cost burden stayed the same with a mortgage as it was as a renter, these borrowers would be disqualified from most mortgages.

Consider the math for a typical Black household, with a median income of $43,600 in 2019. Assuming the same level of debt as above, this household's DTI from student debt alone is 10%. A combined monthly student debt and mortgage payment of $1,497.55, on a monthly income of $3,633, would bring their overall DTI to 41.2% — just below the acceptable 43% threshold for a FHA loan. But at 31.2%, their mortgage-only DTI exceeds both the conventional (28%) and FHA (31%) thresholds, indicating that this household could not afford the typical U.S. home.

Millennial and Gen Z homebuyers are confronted by very real budget pressures, and while a college degree is part of the American dream for many, so is owning a home. For years, the two have worked hand-in-hand: The higher incomes that typically come with earning a college degree helped make homeownership more attainable. But as the cost of higher education rises faster than salaries, college grads are shouldering significant debt just as they age into peak homebuying years, delaying some home purchases and disqualifying others altogether.


The population examined in this analysis is taken from 2007-2019 American Community Surveys. It consists of renter households where at least one decision maker (household head, spouse of household head, or unmarried partner of household head) is between the ages of 28 and 34 and attended at least some college. We assumed this population has student loans and is still paying them off. We assumed the total value of each individual's student loans equals the average student loan value for the year for which the ACS sample was taken.

We assumed that student loan payments were made at either the payment on a typical 10-year loan at the average annual interest rate or at 10 percent of discretionary income (modeled after income-based repayment plans), whichever was smaller. Discretionary income is determined as the difference between household income and 1.5 times the state level poverty guideline for the household size. We used the poverty guideline for the 48 contiguous states and Washington DC for all states – we did not include the poverty guidelines for Alaska and Hawaii separately.

The post Acceleration in Student Loan Debt Could Block Millions From Homeownership appeared first on Zillow Research.