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Lost Wealth: Why the Real Estate Industry Should Hate Student Debt

David Callahan

It's time for the real estate industry -- one of the true 900-pound gorillas in U.S. politics -- to join the battle to reduce student debt burdens. Why? Because the bread-and-butter of that industry, young people who buy new homes, is increasingly threatened by soaring college loans which leaves these potential customers too maxed out to join the "ownership society." 

When the American Dream is working, young people buy homes or condos pretty early on in life, so they can start building up equity and, ideally, own their homes outright by the time they hit late middle age so they can start focusing on building up retirement wealth.  

What's happening these days, though, is that young people graduate from college and professional schools with a mountain of loans which leads them to delay buying homes. When a couple is struggling with combined student debts that can be as big as a typical mortgage, it can be hard both financially and psychically to borrow more money.

In turn, these constraints affect wealth accumulation over a lifetime -- as documented by a new Demos report: "At What Cost: How Student Debt Reduces Lifetime Wealth." The report's author, Robert Hiltonsmith, writes:

Young college-educated households without student loan debt have already begun to accumulate more retirement savings than similar households with student loan debt. More young debt-free households were also able to purchase homes (though this gap narrows when households in their 30s are considered). Debt-free households purchased more expensive homes, put down a larger down payment, and paid a lower mortgage interest rate than indebted households as well. 

In other words, if you don't have debt, you're able to hit the ground running and start building assets -- pulling ahead of your indebted peers.

What's particularly galling is that even indebted young people with more education and higher incomes will find themselves falling behind peers who don't have degrees, or debt. Which is to say that people who get educated in today's debt-for-diploma system may actually be shooting themselves in the foot when it comes to building lifetime wealth. 

Do the math across millions of young people and the results are alarming, as the Demos report found: 

  • Our model finds that an average student debt burden for a dual-headed household with bachelors’ degrees from 4-year public universities ($53,000) leads to a lifetime wealth loss of nearly $208,000
  • Nearly two-thirds of this loss ($134,000) comes from the lower retirement savings of the indebted household, while more than one-third ($70,000) comes from lower home equity. 
  • We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households

At what cost indeed. That's some serious lost wealth. And the next generation also takes a hit because today's indebted grads will have less wealth to pass along to their kids, which will make it harder for them to start building assets. 

Which brings me back to where I started this post: The growing flood of payments to student lenders is diverting money from the housing market. When indebted students don't buy homes, or buy smaller homes, or don't renovate their homes, this hurts the real estate industry: homebuilders, realtors, and mortgage brokers.

So if this industry were smart, it would get involved in the student loan battle. It should back greater subsidies for public universities, more generous grants for low-income students, and proposals to allow students to borrow money as the same low rates as banks do. 

Keep young students out of debt today and they'll be homebuyers tomorrow. That's a pretty easy logic chain to follow.