As cumulative U.S. student debt soars past $1.6 trillion, diligent investors should consider how this will impact the economy — now and over the long term — and how we’ll help students and young professionals navigate the path to homeownership.
Rising tuition at public and private schools contributes to the mounting student debt crisis, putting a damper on homeownership for millennials and Gen Z. Restricted housing budgets, adverse credit score impacts and increasing debt-to-income (DTI) ratios make it challenging for newly minted professionals and college graduates to buy a home and fully participate as consumers in our economy.
While proposed solutions to the student debt crisis are far from ideal, there is an emerging opportunity in multifamily real estate markets to provide affordable housing and develop properties that create value for tenants, operators and investors.
Looking At The Numbers
Even if you’re not repaying a student loan, you may empathize with the burden that scholastic debt places on the younger generations. Some millennials and Generation X are still paying off student loans from decades ago. As student loans become the second-largest class of U.S. household debt, an entire generation is facing setbacks on the path to homeownership.
Among those who have taken out student loans, the average household student loan debt in the U.S. exceeds $47,000. Though many graduate students have loans surpassing this figure, the average debt levels negatively impact most young borrowers’ DTI ratios, credit scores and housing budgets.
People with considerable student loan debt seem to gravitate to rapid-growth markets, analysis of federal student loan data shows. Texas, Florida, New York and California dominate the heat maps for student loan debt: California leads with $135.2 billion, followed by Texas at $108.2 billion.
Over 80% of non-homeowners report their debt holds them back from buying a house. For the young professionals who do manage to buy, their choices are limited by reduced budgets and less-than-perfect credit.
The Federal Reserve has reported that some 400,000 borrowers feel the pinch of student debt; among younger demographics, homeownership rates decreased by 25% from 2005 to 2014. The debt level also adversely impacts the formation of marriages, families and small businesses — all of which drive the housing market and economy. In related research conducted by Zillow, 39% of buyers and half of renters reported that student debt influenced their choice to delay the purchase of a home.
The rising cost of education — amplified by a factor of four over the last three decades — and the lack of comparative growth in wages further contributes to the overall debt that young professionals must absorb to meet living, medical and transportation expenses.
Student debt and rising living costs fuel increasing payment delinquency. With a national default rate over 10%, negative credit events related to student loans are more than enough to hold back a large group of recent graduates and young professionals from becoming entrepreneurs and homeowners. Meanwhile, tuition rates continue to increase at twice the rate of inflation.
What Can We Do About It?
Some politicians have proposed legislation to forgive existing debt and explore reduced-fee and no-cost higher education. Additional strategies to address the crisis include tax relief for borrowers, strict regulation of private educational institutions and more involved financial education and counseling for students and graduates. The Coronavirus Aid, Relief and Economic Security (CARES) Act suspends loan repayment and interest accrual through September 30 for federally backed funds.
A Growing Multifamily Market
Student loan debt has a lot of negative and unfortunate effects on young professionals, but there’s a definite upside for the real estate market. As homebuying becomes less accessible to younger demographics, the demand for affordable multifamily housing increases.
A January 2020 report by CBRE analyzed the impact of rising student debt on the residential housing market. According to Bisnow, the report projects abundant demand for multifamily development in suburban markets. Affordable multifamily options offer better housing solutions to suburban areas than single-family homes. They also align more closely with the budgets of loan-leveraged millennials and zoomers.
Making The Best Of It
Student loan debt is a problem that doesn’t present any optimal or immediate solutions. For most, given the exorbitant cost of higher education, financing educational expenses is a necessity. This inevitably affects the affordability of homeownership for young professionals.
Multifamily developers and operators are actively working to provide safe, appealing and cost-effective housing for the younger demographics as they work to pay off student loans and finally buy houses or condos.
Historically, multifamily housing has been a relatively stable asset class. It will likely continue to offer passive income and steady, reliable returns to investors. Follow the financial development and migration trends of the younger generations to find lucrative opportunities for investment.