Sheepskin Serfs

4 min read

Everyone in America knows that student debt is out of control. Seventy percent of the Class of 2015 will graduate with debt averaging $35,000 apiece, adding to the $1.2 trillion in student loans outstanding, a debt class bigger than car loans, bigger than credit card debt.

What does this have to do with housing?

Does $4 trillion in lost property value get your attention? $12-21 billion in lost annual rent? Over 700,000 renter households now living in other (often familial) accommodations?

We in housing are paying for it, at roughly $3.50 in lost property value per $1.00 of student debt outstanding.

Student debt isn’t simply a sectoral crisis or a Federal albatross, it’s a corrosive agent undermining our business, residential housing nationwide, and the economy itself, because:

  • while these graduates and their families are paying for student loans, they’re not paying for homeownership loans or apartment rentals.
  • in both sectors – ownership and rental – the cost of student debt creates massive negative arbitrage (greater lost asset value in housing than the amount of student debt).

Over 69% of recent graduates have student debt outstanding, with an average of $29,000 per borrower. Another 17% have parents whose student debt averages $31,000 apiece. To earn their sheepskins, the Class of 2015 and their proud parents collectively took out $68 b-for-billion, ten times the amount of 20 years ago.

Of the roughly 37 million student borrowers, 7 million are in default. That’s almost twice the number of homes in foreclosure at the height of the Great Recession. Nor does bankruptcy avail: even if the loans are guaranteed by Sallie Mae; ever since 2005 they are not dischargeable in bankruptcy, a date that happens to coincide with the start of a dramatic rise in student debt. Despite this, the rates are higher than residential rates: they range from 4.3% through 6.2% up to 10.5%.

But in terms of ability to pay for housing, the real demand-killer isn’t the rate but the term: a maximum of ten years, level-payment self-amortizing.

Now for the housing arithmetic. Take a range of student debt from $29,000 (the lowest average I could find) to $45,000 (graduate schools cost more and have less in scholarships), a range of interest rates from 4.3% to 8.2%, and an average term of eight years. Here’s what calculates out:

  • Monthly payment $358 to $609 per graduate.
  • Wage needed to ‘afford’ that debt at 30% of income: $7.15 to $12.20 per hour.
  • Supportable mortgage if the student loan payments were repurposed into a home loan: $75,600 to $128,700.
  • Affordable home purchase price (assuming 20% down payment): $94,500 to $160,900.
  • Total residential property value assuming all student debt repurposed into housing: $3.9 to $4.52 trillion.
  • Total annual rental available assuming all student debt repurposed into rental: $12.2 to $20.9 billion.

While you may think the repurposing exercise fanciful, as it assumes student debtors are paying no housing costs today, remember there are 40 million of them. If even 5% are living in their parents’ house, and if to enable renting they’d triple up, that’s still 700,000 households of lost rental demand – demand from young workers, people you want to hire as rental agents, maintenance crews, or investment analysts, people whose combined income would (in most markets) still fall below LIHTC caps.

Lack of cash flow for young households inhibits labor mobility; defers household formation; defers marriage and childbearing; shrinks housing demand, especially rental housing; and is taking $3.9 to $4.5 trillion of property value out of the economy – value that has historically fueled new business formation and job growth.

Every graduate living at home is a vacant apartment somewhere nearby that the graduate, his or her parents, and the property owner would like to see happily occupied.

As an industry, we rightly make much of our commitment and philanthropic investment in helping LIHTC children complete high school and go to college if that’s their dream. We need likewise to develop a similar commitment, not merely philanthropic but in the industry’s self-interest, to create solutions and career paths for those who upon graduation find themselves unexpectedly indentured as sheepskin serfs.

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at [email protected].