Even though I was working part-time, the mortgage company told us that my debt to income ratio was too high. They couldnt include my income in our mortgage pre-approval. That was the moment we went, Man this is a problem.' —Lindsay Woodruff, a graduate from Xavier University
When 26-year-old Lindsay Woodruff ends her work day, she comes home to her husband and two daughters in Tipp City, a small town in southwestern Ohio. But greeting her at the door are two other family members, her mom and dad. Woodruff and her family are living in her parents’ home until they can pay off her student loan debt.
Woodruff, the assistant director for the education nonprofit group Kids Read Now, does not fit the stereotype of a lazy, self-absorbed member of what's been called the "me me me" generation. She is working full-time and is three credits away from a graduate degree. “There’s a lot of things we’d like to be doing,” she said. “We make a decent income. But we’ve set this benchmark that we’re not going to do anything big until this student debt is paid off.”
Woodruff’s financial situation is familiar for highly educated young people across the country. According to a recent study from the Federal Reserve Bank of New York, young consumers are delaying major purchases like homes and cars because of their student loan debt. Despite the fact that a college education leads to higher earning potential, those 25 to 30 who took out student loans are less likely to be able to make these major purchases than their peers with no student loan debt. College graduates are also increasingly living at home and delaying marriage and childbearing. For highly educated young people, student loans have put their life on pause.
The economic downturn has hit the millennial generation hard. The Bureau of Labor Statistics jobs report for May showed that among those 18 to 34, unemployment was slightly more than 10 percent. According to the Economic Policy Institute, a liberal economic think tank, between 2007 and 2012, the wages of young college graduates dropped 7.6 percent. Compounding the employment situation are the high levels of debt young people have incurred. A study from the Federal Reserve Bank of New York by economists Meta Brown and Syndee Caldwell found that the share of 25-year-olds with student debt has increased from just 25 percent in 2003 to 43 percent in 2012, and the average student loan balance among those 25-year-olds grew by 91 percent over the period, from $10,649 in 2003 to $20,326 in 2012.
Obtaining a college degree is still a path to higher lifetime earnings for this generation. But the necessity of taking on student debt is impacting their lives in profound ways. Brown and Caldwell looked at mortgage debt of 30-year-olds over the past 10 years. They found that historically, those with student debt were more likely to have mortgage debt than those without student debt, which makes sense as those with higher educations would logically have higher salaries and more opportunity to buy a home.
However, since the recession, the trend has reversed, and now 30-year-olds with student loan debt are less likely to own a home than those without that debt. Brown and Caldwell found a similar result when they looked at the automobile debt of 25-year-olds. While historically, student loan borrowers were 3 or 4 percentage points more likely to have a car payment, since the recession hit, those with student loans are now less likely to be able to afford having a car. Consequently, student loan debt is keeping a generation of highly educated consumers from making major life purchases.
And it may not be just big economic purchases that young people are delaying due to the poor economy. According to a survey conducted last year by the Pew Research Center, a polling and research nonprofit group, young people have been delaying major milestones in their personal lives as well. In that study, 31 percent of those 18 to 34 who were surveyed said they have postponed either marriage or having a child, with 20 percent saying they have put off getting married and 22 percent saying they have postponed having a baby. Almost a quarter of the survey respondents said they had moved back in with their parents after living on their own.
Lindsay Woodruff and her husband thought they were doing everything right. She obtained a degree from Xavier University, which left her with $16,000 in student loan debt, below the current national average for college debt. And though she was accruing $22,000 in debt from her graduate degree, the Woodruffs were financially stable. After the birth of their first daughter, they owned a home they could afford, they took Dave Ramsey’s financial course and they paid off their credit card debt and the debt on their cars.
When they found out another child was on the way, they decided they needed more space. They sold their home, moved in with Woodruff’s parents and began a new house hunt. But when they went to apply for a mortgage, they were rejected by lenders.
“Even though I was working part-time, the mortgage company told us that my debt to income ratio was too high,” said Woodruff. “They couldn’t include my income in our mortgage pre-approval. That was the moment we went, ‘Man this is a problem. Why are we trying to buy a house? Our priority should be paying off the student loan.’ ”
Brown and Caldwell hypothesized that a tightening in underwriting standards is likely a major cause of people like Woodruff delaying home and car purchases. Examining credit score data provided by Equifax, a consumer credit ratings agency, Brown and Caldwell concluded that the average credit score for 25-year-olds who did not have student loan debt was 15 points above that for student borrowers, and the average score for 30-year-olds who did not have student loan debt was 24 points above that for student borrowers.
According to a Pew Research Center study, the debt-to-income ratio of younger adult households more than doubled from 1983 to 2007. This is forcing millennials into a tight spot. A higher education will likely provide them with higher earnings down the road, but it will hurt their ability to obtain credit in the near future.
An uncertain future
While the impact of student debt on young peoples’ ability to purchase big-ticket items is hard on individuals, it may also be hurting the country’s economic recovery. Brown and Caldwell found that college educated young people are no longer filling the same economic role that they once did. “While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace,” they said.
Currently, student loans are at the crosshairs of a political battle. If the government does not act by July 1, interest rates on federal subsidized loans will double from 3.4 percent to 6.8 percent, increasing the pain for young people who are already in a tough financial position.
Republicans and Democrats are currently debating whether the student loan interest rate should float with the market interest rate or should be at a fixed rate. Sen. Elizabeth Warren, D-Mass., has proposed that the government should let students borrow at the same rate Wall Street banks can borrow from the Federal Reserve, around .75 percent.
But while lowering interest rates may alleviate the burden felt by young borrowers, the reality for college-educated millennials is that their total student loan indebtedness will likely remain high relative to their incomes. And for many young people, the result has been a fundamental shift in the way they think about traditional markers of adulthood. To Lindsay Woodruff, the importance of hitting particular ownership milestones simply no longer takes precedence. “The American consumer is obsessed with the idea that you have to own all these things,” she said. “I don’t think they are as important as paying off my debt.”