New Policy Interventions Can Put Homeownership Within Reach for Black Households with Student Loan Debt

Research from the Urban Institute and FHLBank San Francisco examines the role of educational debt in widening the racial homeownership gap

SAN FRANCISCO and WASHINGTON, Nov. 10, 2022 – The connection between student loan debt and access to homeownership for Black borrowers is complicated by credit history, debt-to-income ratios, and lack of intergenerational wealth. Still, a number of programs and initiatives targeted toward Black graduates and other underserved groups can partially compensate for historical discrimination these households have faced that limited opportunities to own homes and build wealth.

A comprehensive new report from the Racial Equity Accelerator for Homeownership — a collaboration of the Federal Home Loan Bank of San Francisco (FHLBank San Francisco) and the Urban Institute — examines how student loan debt affects homeownership among young Black adults and explores ways to diminish the interference of such debt on homeownership attainment.

"The American dream of homeownership should be available to those paying off their college education," said Teresa Bryce Bazemore, president and CEO of FHLBank San Francisco. "Understanding the effects of student loans on mortgage lending, particularly for Black graduates who are more likely to be burdened with debt after graduation, will help us to bridge the racial homeownership gap with actionable solutions. We're proud to partner with Urban Institute to identify the systemic changes that will make homebuying more equitable."

The Student Loan Debt and Access to Homeownership for Borrowers of Color report notes that evidence directly correlating low homeownership rates to student loans is weak. In fact, homeownership rates have been on the decline for all racial and ethnic groups between 2000 and 2019, but the drops have been steepest for Black and Hispanic households. And student loans feature prominently. The homeownership rate for Black households with bachelor's degree-holding heads ages 25 to 40 is at 36 percent, which is lower than the rate for white households with heads without a high school diploma, which is at 40 percent.

In an examination of 2019 credit bureau and Home Mortgage Disclosure Act data, the report finds, conservatively, "3.2 percent of mortgage applications likely to be denied because of credit history (3.7 percent in predominantly Black neighborhoods) would have qualified for a mortgage if not for their student loan's impact on credit history."

The relationship between student loan debt and mortgages is not linear, as the data showed that most mortgage applicants are denied because of low credit scores, lack of collateral, and high ratios of debt to income (DTI). Black student loan borrowers are likely to have lower credit scores, which themselves are a product of difficulty repaying student loans, but also medical and utility debt. Moreover, Black borrowers are more likely to take on larger student loans because their parents are unable to support their educational attainment financially. This larger debt payment can also affect borrowers' qualifications for a mortgage. 

Black borrowers are subsequently more likely to put off homeownership because of the higher debt load and the lack of downpayment support from their families. This is part of a vicious cycle where, over generations, Black households have had less access to homeownership and therefore, the chance to accumulate the intergenerational wealth to fund higher education for their children. 

More lenient treatment of student debt could lead to incremental improvement in the racial homeownership gap between Black and White households. Emerging programs are offering more flexibility in how student loan debt is examined in mortgage underwriting. If student loan borrowers enroll in income-driven repayment programs and underwriting gives less weight to student loans, borrowers can experience boosts in credit scores and more favorable debt-to-income ratios, thus potentially positioning more borrowers for homeownership.  

Other programs are merging student loan payments with mortgage payments through cash-out refinancing. This option allows homeowners to tap their home's equity to pay off or pay down student loans. But they would have to have significant equity in the first place to benefit from these types of programs. Because Black homeowners, on average, have higher loan-to-value ratios, they are less likely to qualify. In some ways, the program may make homeownership more sustainable for student loan borrowers, but it does not help more student loan borrowers access homeownership to begin with. Moreover, it would put any potential forgiveness at risk.

There are also a number of state-funded downpayment subsidies targeted toward student loan holders, however, these programs can unintentionally worsen the homeownership gap. They have requirements, such as high credit scores, that seem more helpful to borrowers who are already mortgage-ready than to debt-burdened borrowers of color. 

Creating a pathway to a mortgage, especially for Black student loan borrowers, is likely to require new kinds of interventions. These could include simplification of federal student loan repayment programs; better counseling for students before, during, and after college; special purpose credit programs that target specific disadvantaged groups; and programs that aim to remedy the underlying multigenerational racial wealth gap.

Increased awareness of how student loans could affect access to homeownership is paramount, the report notes. 

The report also states: "Housing counselors could play a large role in this space. It would be beneficial to give counselors templates to guide borrowers on different options for student loan repayment that could help them lower their DTI ratios or improve their credit scores. Additionally, earlier education on how student debt affects credit, DTI ratios, and homeownership prospects could help young adults become mortgage ready."

# # #

About the Federal Home Loan Bank of San Francisco

The Federal Home Loan Bank of San Francisco is a member-driven cooperative helping local lenders in Arizona, California, and Nevada build strong communities, create opportunity, and change lives for the better. The tools and resources we provide to our member financial institutions–commercial banks, credit unions, industrial loan companies, savings institutions, insurance companies, and community development financial institutions–foster homeownership, expand access to quality housing, seed or sustain small businesses, and revitalize whole neighborhoods. Together with our members and other partners, we are making the communities we serve more vibrant, equitable, and resilient.

About the Urban Institute

The nonprofit Urban Institute is a leading research organization dedicated to developing evidence-based insights that improve people's lives and strengthen communities. For 50 years, Urban has been the trusted source for rigorous analysis of complex social and economic issues; strategic advice to policymakers, philanthropists, and practitioners; and new, promising ideas that expand opportunities for all. Our work inspires effective decisions that advance fairness and enhance the well-being of people and places.