When College Prevents You From Buying A Home

A few years ago, it seemed to make sense for young people who couldn't find work to go to school instead. Today, that's a harder call.

Education still pays, but evidence is mounting that recent college grads – especially those who piled up debt to help pay for school – are faring worse than many others in the aftermath of the Great Recession. While it isn't news that young workers are struggling, new economic data is raising fresh questions about the wisdom of taking on debt to pay for education.

The amount of student debt has exploded during the last few years. The percentage of 25-year-olds carrying student loans rose from 25 percent in 2003 to 43 percent in 2012, according to the Federal Reserve Bank of New York. Of those with debt, the average balance rose from $10,649 to $20,326, a 91 percent jump. Overall, there's nearly $1 trillion of student loans outstanding, more than any other type of debt except mortgages.

High student-debt loads wouldn't be a problem if grads were getting good jobs and earning decent money. Problem is, they're not. A recent study by the Economic Policy Institute documented many of the trends young workers have been reporting anecdotally for several years. Recent grads face much higher unemployment and underemployment rates than the workforce as a whole. Good jobs, such as those that offer healthcare benefits, are increasingly hard to find. And it's much worse for young workers who only have a high school education.

Getting a slow start on a career can have long-lasting effects.

"For the next 10 to 15 years, those in the Class of 2013 will likely earn less than if they had graduated when job opportunities were plentiful," the EPI study contends. For those with debt, the strain will be even worse.

In another new study, the Federal Reserve Bank of New York has now identified some of the ways student debt is already harming young workers and slowing the overall economy. Fed researchers Meta Brown and Sydnee Caldwell found, for instance, the home ownership rate for 30-year-olds with student debt fell by twice as much from 2008 to 2012 as it did for 30-year-olds without student debt. The upshot is that many young college grads will buy their first home later in life than in prior generations, with less spending on things like appliances, furniture and other goods that keep the economy humming.

Young people are buying fewer cars too, with a much sharper drop-off among 25-year-olds with student debt than among those without. Young buyers without student debt – which includes those who never went to college as well as those who got through without any loans – are now taking out bigger loans to pay for homes and cars than those who do have student debt, a startling flip from historical patterns.

It's still clear that workers with a college education earn far more and enjoy much higher living standards than those who never go to college. So the question isn't whether a college education is worth it.

The real question is how deeply into debt you should go to get a college degree, and what the alternatives might be. It might make sense to work your way through school to help pay for it, for example, even if it takes longer than relying on loans. Delaying school might be worthwhile if it allows you save money. Shopping around for the best deal is obviously important, as it is with any big purchase. So too is a course of study that offers good job prospects.

Colleges, for their part, need to do a much better job of making sure their customers get a positive return on their investment – or regulators might do it for them. The cost of college education has been rising much faster than inflation, a pernicious trend that has caught the attention of President Barack Obama and many other politicians.

Recent college grads also need a strong economy to provide the job opportunities that will allow them to get ahead. In that sense, they face the same challenge as millions of other Americans who feel like they're falling behind and aren't sure when the escalator will start moving upward again. When it does, the value of that college diploma will become clear.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.


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