An analysis on the cost of student loans and home-buying nationwide finds that it takes graduates with the average student loan debt of $28,950 about 5 years longer to save a 20 percent home down payment. Thereafter, these graduates have almost $50,000 less in home equity 15 years after graduation compared to debt-free graduates, according to an analysis by GoodCall, The Real Cost of Student Loans. In Connecticut, where 62 percent of students graduate with debt averaging $29,750, above the national average, and home prices tend to be higher than in most states, the challenge is particularly acute. Delaware has the highest average student loan balances, at $33,808. Utah has the lowest, with $18,921, according to data compiled by the Institute for College Access & Success and included in the report.
Nationally, average debt for new bachelor’s degree recipients rose at more than double the rate of inflation from 2004 to 2014, but in some states it grew even faster. In Connecticut, the percentage of graduating students with debt rose from 57 percent in 2004 to 62 percent in 2014; the average amount of debt increased by 57 percent (20th highest increase among the states), from $18,906 to $29,750.
Homeownership has generally fallen over the past decade, and for college graduates with student loan debt, the downward trend is even more marked, according to research by the Federal Reserve Bank of New York, the report indicates. What is clear, the report notes, is that after college, graduates with student debt must use part of their income to pay down loans. This means less income is available for saving compared to debt-free graduates.
It also means that graduates with student loan debt will have to save at a higher rate than their debt-free counterparts to buy a home sooner. This points to another challenge student loan borrowers face: making tough decisions over whether to pay student loans off as quickly as possible or save for big purchases like a home, the report explains.
Waiting longer to buy a home can mean missing out on accruing home equity, an important part of building wealth and financial security over the long term. Home equity is how much of the home’s current value is owned by the homeowner. This is calculated by taking the current market value, which typically grows year over year, and subtracting any remaining mortgage payments.
A recent Harvard study noted in the report revealed the consequences for wealth building that these financial decisions can have over the long-term, where college-educated households with student loan debt were found to have significantly less in assets, cash savings, and net wealth compared to college-educated households without student loans.
Among the report’s key findings regarding the home buying timeline:
- A 23-year-old debt-free college graduate today will be ready to buy a home with a 20 percent down payment in 2021 at age 28. That’s five years earlier than the 33-year-old average home buyer today.
- Graduates with $12,000 in student loan debt can expect to save until 2022 before they’re able to put a 20% down payment on a median price home.
- A 23-year-old graduate with $28,950 in student loan debt today will be saving until 2026 before she can make a 20% down payment on a home, at age 33 – the current average age for home buying.
- Graduates with $50,000 in student loans will be saving until age 36 in 2029 before they’ll have enough for a 20 percent home down payment.
The report also highlights the impact of student loans on the age at which people decide to get married, their job choices, starting salaries and retirement savings – and the impact those choices have on their ability to pay off student loans.