Student loan debt found to be a major contributor to homeownership disparities

According to the U.S. Treasury, white Americans have a homeownership rate of 75 percent, while Black households have a 45 percent rate and Hispanic families have a 48 percent rate.

The reason for this is multifaceted and rooted in deep systemic inequalities; thus, it can’t be attributed to one factor alone. However, there is a single thread underlying many of the reasons why families of color have lower rates of homeownership – student loan debt.

Borrowers of color shoulder most of the nation’s student loan debt

On average, nonwhite borrowers take on more student loan debt and have longer repayment periods than white borrowers. This isn’t just a coincidence; the racial wealth and education gap are driving forces behind this disparity. A Brookings Institute report found that almost half of Black students owe more than they initially borrowed four years after graduating.

A 2022 Bankrate survey reported that 64 percent of Black respondents and roughly 70 percent of Hispanic borrowers have delayed financial milestones – like buying a home – due to their student loan debt. In comparison, less than half of white respondents agreed. This comparison makes sense when taking into consideration that Black college students take out the most student loan debt for a bachelor’s degree.

What’s more, Black students hold nearly twice as much student loan debt than their white classmates four years after graduating. This can be greatly attributed to interest accrual and borrowing costs for a graduate degree. Plus, the 2022 survey also found that 68 percent of white students said they didn’t take out student loans for college, while only 57 percent of Black respondents and 64 percent of Hispanic respondents stated that they didn’t borrow as well.

The correlation between student loan debt and homeownership rates

FHLBank San Francisco President and CEO Teresa Bryce Bazemore asserts that wealth inequality, student debt and homeownership disparities are all connected. Parents who are homeowners have the option to tap into the equity they’ve built up in their home to help pay for their child’s education rather than exclusively borrowing loans to cover the cost.

However, due to the racial homeownership disparities, this is a luxury that not as many families of color can take advantage of when compared to white families. “We know that the gap in homeownership at about 29% between Black and white homeowners is larger than it was before the Civil Rights Act was passed in 1960,” Bazemore says.

Due to the lack of generational homeownership and the existing income gap, borrowers of color often have to turn to student debt more frequently than their white counterparts. In turn, this makes it more difficult for borrowers of color to get approved for a mortgage based on their debt-to-income ratio even if they have sufficient income to purchase a home, Bazemore adds.

A college degree isn’t enough to achieve income parity

While a college degree can be helpful, and even necessary for some careers, it’s not a fix-all for the income disparities in the country. In fact, a 2018 American Sociological Association study concluded that, “student debt may be a new mechanism of wealth inequality that creates fragility in the next generation of the black middle class.”

Due to the sheer amount of student loans that people of color need to borrow to cover their degree, it’s possible that this could actually be reinforcing the racial wealth gap. A 2021 Brookings report echoes this sentiment while proposing that lawmakers and experts seek solutions that center on the experience of Black borrowers.

“The Black-white wage gap is getting worse, while Black communities’ indebtedness is increasing,” the report reads. “If we can create systems that recognize these lived experiences, we can create more equitable outcomes for everyone.”

Black borrowers, students of color hit with highest denial rates

Student loan debt, especially private student loans, can have significant long-term impacts on your creditworthiness and overall financial health. And since borrowers of color carry more debt than their white peers, they’re most likely to experience the credit ramifications of carrying long-term debt.

Repayment history and amounts owed make up the two largest factors when looking at your FICO score, which is the most commonly used credit scoring model by lenders. The more debt a borrower has, the higher their credit utilization ratio – the amount of available credit – is, which can inhibit their ability to get approved for a mortgage down the road.

Dr. Jessica Lautz, deputy chief economist and vice president of Research at the National Association of Realtors says that this problem extends into mortgage denial rates. “We know that the denial rate for mortgages is higher even for qualified borrowers when they go to purchase a home for Black individuals and for Hispanic individuals in comparison to white individuals,” she says.

Dr. Lautz also mentions that in recent years, over half of Black homeowners are first-time homebuyers. “When we think about the affordability crisis, it’s going to hurt first-time home buyers who have to save for that down payment more,” she adds.

For those who have hundreds of dollars in student loan payment a month, setting money aside for a downpayment may not be possible, especially for individuals with high-interest private loans. What’s more, first time home-buyers can’t rely on a generational transfer of wealth to help cover the cost of higher education or secure a down payment on a mortgage.

Borrowers of color should be aware of potential earnings, living economically

Getting approved for a mortgage with student loan debt isn’t impossible, but those with higher levels of debt may have a harder time. Bazemore advises that students plan ahead for their collegiate careers and look for scholarships and grants, as well as the lowest-cost loans available.

For borrowers who are no longer enrolled or have already graduated, Bazemore says that, if possible, it’s best to pay down the principal balances on time and as quickly as possible to aid in the mortgage approval odds. She also advises that once they’re out of school, borrowers of color should apply for down payment assistance programs if they qualify.

Dr. Lautz encourages students to not turn away from a college degree if they have to use student loans, but rather that they understand the full equation when looking at postgraduate life. “Be cognizant of future earnings, but also largely economic living,” she says. For example, those who have the flexibility may want to consider living in a smaller town rather than a big city to gain more financial freedom.