How student loan policies widen the homeownership gap

As borrowers prepare for the resumption of debt payments on their student loans, they face distinctly different economic conditions than the ones in which they were last obligated to make regular repayments in March 2020 — and this poses special challenges for those hoping to buy a home.  

Even with Americans’ increased savings rates during pandemic lockdowns and restrictions, the dream of homeownership is increasingly out of reach as home prices rise, mortgage rates fluctuate and inflation eats away at dollars available for a down payment. 

For Black Americans with student loan debt, the home buying dream may be disappearing altogether. A new report from researchers at the Housing Finance Policy Center at the Urban Institute, in collaboration with the Federal Home Loan Bank of San Francisco, explores how student loan debt may be holding America back when it comes to achieving racial equity in homeownership.

Our analysis of Census Bureau American Community Survey data shows that in 1960, before the passage of the Fair Housing Act, Black Americans owned homes at a rate of 27 percentage points less than their white counterparts. In 2021, more than 50 years after the landmark legislation, the gap has worsened to 29 percentage points; according to the U.S. Census Bureau, the homeownership rate among Black Americans is just 44 percent compared to 73.3 percent among white Americans.

Homeownership rates have declined across the board among young adults (ages 25-40) following the Great Recession, but the declines have been more pronounced among Black Americans. Currently, young Black adults with a college degree have a lower homeownership rate than white young adults without a high school diploma. Researchers have found that Black applicants have the highest mortgage denial rate of all racial and ethnic groups, even after adjusting for income disparities. The most common reasons for the denial are an applicant’s credit history and debt-to-income ratio.  

The Housing Finance Policy Center report points out that “a larger share of Black households than of any other racial or ethnic group holds student loans,” and “among households with student loan debt, Black households have the highest average and median debt levels.” The outsized impact of student debt, especially on Black young adults, can and should be mitigated by reconsidering how it is factored into debt-to-income (DTI) ratios and by treating it more leniently in credit reports.  

This starts with making underwriting standards more flexible when calculating DTI ratios. As well, students have options when choosing how to repay their federal loans — including a standard 10-year repayment with fixed monthly payments and an income-driven repayment (IDR) plan. With IDR, borrowers begin repaying their debt once their earnings reach a certain level, payment amounts are based on income above the threshold, and forgiveness may be possible after a set time. Rather than factoring in the amortized amount of a loan, underwriters can use the typically lower IDR payment amount to bring down the DTI ratio. It’s clear that better education about these options and their associated benefits should be a goal.  

Borrowers who miss payments for private or federal student loans risk having delinquencies reported to the credit bureaus. The Housing Finance Policy Center found that having at least one student loan debt delinquency on a credit report was associated with a 59-point drop in a credit score. A delinquency is not a temporary blip that is quickly overcome; it remains on a credit report for seven long years. By adopting a more lenient treatment of student loan debt, credit bureaus could contribute to some improvement in enabling homeownership, particularly among Black households. 

Revisiting how student loan debt is treated in underwriting and in credit reports is a critical step, but it’s just as important for state and federal governments to explore how they can serve their constituents in developing practical and equitable solutions. Some states have tested SmartBuy programs, which offer down payment assistance to student loan borrowers, but because of income and credit score requirements Black borrowers are less likely than white borrowers to be eligible for these programs. Cash-out refinancing programs, such as Fannie Mae is offering, enable borrowers to pay down student loan debt with home equity, potentially lengthening the repayment term and lowering the interest rate. However, this has some drawbacks, as student loans become tied to a risk of foreclosure should payments be missed. 

The Biden administration’s student loan forgiveness plan, slated to be heard by the Supreme Court in February, is another step that could increase access to homeownership for some Black borrowers. The plan promises to forgive up to $10,000 in federal student loans for qualified borrowers — with up to $20,000 in forgiveness for those with Pell grants, which Black students are more likely to access. The plan also calls for a more generous IDR plan, and the Fresh Start initiative would allow borrowers in default to apply to have defaults removed from their credit records, potentially giving loan applicants a cleaner slate for the underwriting process. 

Although the overall impact of student loan debt on homeownership rates has proven difficult to quantify, data indicate that it may interfere with the dream of homeownership in historically marginalized communities. For Black Americans, we need to do more to explore viable options that adjust for deep-seated conventional underwriting factors, such as DTI ratios and credit histories. Beyond the mortgage decision process, we must consider additional relief and assistance methods to close the racial homeownership gap.  

Our research collaboration has helped to close the knowledge gap, and with new policy interventions, homeownership will be within reach for more Black households with student loan debt. In addition, the Federal Home Loan Bank of San Francisco will actively explore ways that solutions might be tested in partnership with its member financial institutions and other stakeholders, with the goal of bringing homeownership into reach for more Black households burdened by student loan debt.  

Teresa Bryce Bazemore is president and CEO of Federal Home Loan Bank of San Francisco. Jung Hyun Choi is a senior research associate and Sandy Baum is a nonresident senior fellow at the Urban Institute.