Student loans are often seen as a major obstacle for young homebuyers, but the impact is nuanced depending on the borrower. While it's true that debt levels are higher today than in past decades, First American Senior Economist Sam Williamson analyzed data from the 2022 Survey of Consumer Finances (SCF) — the most recent data available — to identify trends that help put the weight of student loan debt into perspective.
Williamson found that student loan payment-to-income ratios have decreased, helping borrowers better manage both student loans and mortgages. Despite the rise in average loan balances from $12,600 in 1992 to $40,600 in 2022, the share of income young households spend on student loan repayments dropped from 7.4% to 5.9% between 2016 and 2022.
The average inflation-adjusted income for young households with student debt increased from $73,000 to $122,000 between 1992 and 2022 – an increase of nearly 70%.
Much like a mortgage, monthly student loan payments depend on more than just the loan amount and income of the borrower. The average loan repayment term has almost doubled from 7.5 years in 1992 to 13.9 years in 2022, lowering monthly payment-to-income ratios. Just as extending a mortgage term from 15 to 30 years allows home buyers to borrow more money for a similar monthly payment, almost doubling the student loan repayment term accommodates more debt for a similar monthly payment.
Student loan interest rates have declined. The average annual interest rate on student loans has decreased by two percentage points, from nearly 8% in 1992 to around 6% in 2022. Longer repayment terms and lower interest rates have increased “education-buying power,” while lowering payment-to-income ratios.
First American's report identified that higher education achievements typically translate into house-buying power. Among millennials, the gap in house-buying power between those with a high school diploma (or some college/associate degree) and those with a bachelor’s degree was approximately $250,000 in 2022, adjusted for inflation.
