Will Student Loan Debt Derail Your Children’s Homeownership Dreams?

As the mother of a high school junior, I twitch a little bit every time she talks to me about where she might like to attend college. Far too many of her choices have a sticker price of $60,000 a year once you add up room, board, books, tuition, and pizza.

So I’m not surprised when I hear news reports about the rising number of Americans with student loan debt and how that might influence their ability to buy a home. We know, for instance, from the NATIONAL ASSOCIATION OF REALTORS® “2013 Profile of Homebuyers and Sellers” that of the 12% of buyers who said saving for a downpayment was difficult, 43% cited student loan debt as a reason.

But I was surprised to find out the driving force behind rising student debt levels isn’t rising tuition — it’s falling family wealth.

Perfect Storm of Debt

Outstanding student loan debt has doubled since 2007, and in that time “millions of American households experienced severe economic shocks, including large declines in home value, unemployment, and big drops in retirement account values,” said Rohit Chopra, Consumer Financial Protection Bureau (CFPB) assistant director and student loan ombudsman, in a speech at the Federal Reserve Bank of St. Louis.

Essentially, it’s not just that schools cost more, but parents’ savings took a hit, so more kids are taking out loans. Then young adults leave college behind the financial eight ball.

As of 2010, 40% of households headed by an American under 35 were on the hook for a student loan. Meanwhile, the real wages of young college graduates declined by 5.4% between 2000 and 2011. Not only are students paying more when they have to borrow to pay for college, the wages that a college degree nets them are falling.

How Much Do Students Owe?

The College Board estimates the average student with a loan owes $26,500. If she’s paying 3.4% interest and repays the loan over 10 years, she’s got a monthly payment of about $260.

That $260 won’t stop her from qualifying for a mortgage any more or less than a similar payment for an auto loan or credit card. (What some people may not realize it that lenders don’t treat student loan debt differently from other debt.) But if that graduate is earning $30,000 a year and also has a $400-a-month car payment or uses charge cards to live beyond her means, buying her first home may indeed be a challenge.

Why Do Homeowners Need to Care?

Because college graduates are the ones who’ll be buying entry-level homes in the years ahead.

• When young people can’t afford to repay student loans and default, their credit scores drop and they can have trouble qualifying for a mortgage.

• When they’re forced to spend too much of their income on student loans, they may not have enough money left at the end of the month to save for a downpayment.

What About Americans Who Don’t Go to College?

Recently, they’ve been more likely to buy homes than their college-educated counterparts. “In 2012, for the first time in at least 10 years, 30-year-olds with no history of student loans were more likely to have mortgage debt than those with student debt,” Chopra said.

Historically, a college education has been a ticket to eventual homeownership because you’re more likely to be employed and have a higher income than non-graduates.

It’s possible that rising student loan debt could change that trend and, if it does, that’s bad news for anyone who needs to sell an entry-level home.

What This All Means for You

If you do borrow, be wary of the deal you’re offered. The CFPB has made it clear it’s going to take on the private student loan industry, but until then you might be better off using a home equity loan to pay for college. You have consumer rights when you use a home equity line or loan that you won’t get with a private student loan, plus the equity loan interest may be deductible.

Related: When to Use Home Equity and When Not To