Abstract

We estimate the effect of student loan debt on subsequent homeownership in a uniquely constructed administrative data set for a nationally representative cohort. We instrument for the amount of individual student debt using changes to the in-state tuition rate at public 4-year colleges in the student’s home state. 8 percentage points for public 4-year college-goers during their mid-20s, equivalent to an average delay of about 4 months in attaining homeownership. Validity tests suggest the results are not confounded by local economic conditions or changes in educational outcomes.

I. Introduction

While the overall US homeownership rate has fallen markedly since the onset of the Great Recession, the ong young households. The homeownership rate for households headed by individuals aged 2432 fell 9 percentage points (from 45% to 36%) between 2005 and 2014, nearly twice as large as the 5 percentage point drop in homeownership for the overall population (Current Population Survey). In trying to explain this rapid decline, rising student loan balances have been implicated as an important drag on homeownership for the young by an array of economists and policy makers as well as by the popular press. 1 Theoretically, student loan debt could depress homeownership by reducing borrowers’ ability to qualify for a mortgage or desire to take on more debt. In corroboration, recent surveys have found that many young individuals view student loan debt as a major impediment to home buying (e.g., Stone, Van Horn, and Zukin 2012; Shahdad 2014). Despite the attention the issue has received and the intuitive appeal of the causal claim, the evidence establishing an effect of student loans on homeownership is far from definitive.

Estimation of the effect of student loan debt on homeownership is complicated by the presence of other factors that influence both student loan borrowing and homeownership decisions. Researchers have previously attempted to isolate the effect by controlling for a set of observable student characteristics (Cooper and Wang 2014; Houle and Berger 2015). These studies found only small negative effects of increased debt burdens on homeownership. However, the covariates recorded in available data sets may not adequately control for every important omitted factor, resulting in biased estimates. For example, students preparing for a career with a high expected income might borrow more to fund their college educations and also might be more likely to own a home in the future. To address the endogeneity of student loan debt, Gicheva and Thompson (2015), in their study of the effects of student loan debt on the future financial stability of student loan borrowers, use the national average levels of student loan borrowing as an instrument. They find a more meaningful effect size, but identification in their approach may be confounded by other aggregate trends. 2

In the context of the existing literature, this paper makes two key contributions. First, we use a uniquely constructed administrative data set proceed this site that combines anonymized individual credit bureau records with Pell Grant and federal student loan recipient information, records on college enrollment, graduation and major, and school characteristics. The core credit bureau data-onto which the other anonymized data sources are merged-are based on a nationally representative sample of individuals who turned 18 between 1991 and 1999 and include data through 2014. The administrative nature of our data likely provides us with more accurate measures of financial variables than the self-reported data sets that are often used in the literature.

Second, we use an instrumental variable approach, along with a treatment/control group framework, to identify the causal effect of changes in student loan debt on the homeownership rate for individuals between the ages of 22 and 32. The instrument is generated by increases in average in-state tuition at public 4-year universities in subjects’ home states. Specifically, we instrument for the total amount of federal student loans an individual had borrowed before age 23 with the average in-state tuition at public 4-year universities from the four school years following the individual’s eighteenth birthday. This tuition rate directly affects the amount students at these schools may need to borrow to cover their educational expenses, but it cannot be affected by any choice or unobservable characteristic of the individual. In our preferred specification, we further restrict the sample to the population that did not offset any tuition increases with need-based Pell Grant aid and for whom the instrument is consequently most relevant.