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Americans now hold close to $1.2 trillion in outstanding student loan debt making it the second largest form of consumer debt after home mortgages. What are the implications for housing markets, household formation, and economic mobility for the next generation? Are there creative approaches to reduce the burden?

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By Michael Spotts ​

The number of households aged 25-34 with student debt increased by 50 percent from 2001-2010, ending the decade with nearly four in ten households with student loans. Though taking on student debt is often an all-too-necessary part of obtaining higher education, when it leads to a completed degree it can be a pathway to increased earning potential over a lifetime. However, the share of this age group with at least $50,000 in student debt has more than tripled—at a time in which average earnings for young college graduates have fallen by more than 15 percent since 2000. As we will explain, these trends argue strongly for a greater policy focus on the need for affordable rental housing.

Elevated unemployment levels, weak incomes and high debt levels may account for the slow rate of household formation that we have seen coming out of the housing and financial crises. Whether measuring existing Millennial-headed households or those we expect to form in the coming years, it is a near certainty that many will be renters. In addition to falling incomes, mortgage credit continues to remain tight and monthly student loan payments affect the maximum mortgage payment a lender might entertain. This in turn limits the loan size and house price young singles, couples, or families might consider (assuming they are able to provide a down payment).

High student loan debt is therefore a factor contributing to increased demand for rental for the foreseeable future. Moving forward, the adoption of feasible policy solutions to the challenge of rising student debt levels is unlikely. Widespread debt restructuring or forgiveness on the scale necessary to fundamentally shift the prevailing trends is untenable from a budgetary or political perspective. Furthermore, there is little progress in implementing sustainable, long-term changes that would slow the increase in higher education costs, meaning future students and graduates are likely to face similar challenges.

As we wait for more durable economic and educational reform, it is the role of the housing sector to seek a more balanced housing policy that puts rental housing and homeownership on an equal playing field. Unfortunately, this balanced policy has not yet been achieved. In addition to the rhetorical bias toward homeownership (a recent Federal Reserve Bank of New York blog post described young non-owners as “on the sidelines of the housing market,” despite the fact that many are renters), significantly more resources are dedicated to homeownership subsidies and to wealthier households than to support of affordable rental housing. Yet there is a clear and growing need for rental housing. Aside from the households that traditionally rent (for reasons including economics and affordability, the mobility and flexibility renting offers, or personal preference), many young households who would normally buy are renting, and there may be a surge in rental demand if the economy improves and Millennial household formation rates begin to increase.

As demand rises, supply constraints are leading to significant rental cost burdens, particularly at the low end of the income distribution. According to the JCHS, among households earning $15,000–$29,999, three-quarters of renters are cost burdened and more than two-thirds are severely cost burdened. In the near term, supply is likely to remain constrained. While the multifamily market has rebounded better than the single-family market, the number of new units under construction in 2013 still lags historical trends, and older units from higher-production decades are being demolished, many of which are part of the lower-cost housing stock. Insufficient new supply relative to historical trends and a declining homeownership rate have led to rental vacancy rates that are at their lowest point since 2000, allowing rent to outpace inflation. To underscore the scope of the supply problem, if we were to dedicate every single new housing unit produced at current construction rates to extremely low-income households, it would take more than 8 years to fill the gap of 8.2 million affordable and available. That does not even begin to account for the demolition of older units, new household formation, or the housing needs of other income cohorts. 

To address this housing imbalance, several crucial steps should be taken at all levels of government:

  • State and local governments should take action to remove zoning and regulatory barriers to both market-rate and affordable housing. As the recent Enterprise-ULI Terwilliger Center for Housing Bending the Cost Curve research shows, there are numerous restrictions prevalent throughout the country that both decrease the supply of housing and make housing that is built less affordable.
  • In efforts to reform the housing finance system, Congress should take steps to ensure credit liquidity, particularly in the multifamily and affordable sectors.
  • Existing federal support for the development and preservation of affordable housing should be protected and expanded. The Low-Income Housing Tax Credit, HOME program, and Project-Based Rental Assistance are a few examples of programs that have been threatened in recent years but are necessary to ensure an adequate supply of affordable rental housing.

A strong, balanced housing policy would benefit not only those burdened by student debt, but also families across the income spectrum, by creating affordable options that allow them to meet their specific needs.  

Michael Spotts is a senior analyst and project manager at Enterprise Community Partners, Inc. 


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