Delayed gratification

A COLLEGE degree has never been more necessary: graduates earn, on average, 80% more than high-school graduates. Yet ever more Americans are taking on serious debt in exchange for that diploma. Between 2004 and 2014, student-loan balances more than tripled to nearly $1.2 trillion. The average debtor leaves college owing around $27,000.

Some of this mounting debt is good news. More Americans are going to college—undergraduate enrolment rose by nearly 40% between 2000 and 2010, according to the National Centre for Education Statistics. Many are also staying around for a second degree. But the cost of college has also risen sharply, as state spending on higher education has plummeted. Average tuition fees have surged 40% in the decade to 2015-16 for full-time students at public four-year colleges, and 26% at private ones. Those who take longer to graduate—as many increasingly do—simply rack up more loans.

Outstanding student loans are now second only to mortgages when it comes to household debt in America. This makes some economists worry about their macroeconomic effects. Though the housing market has been steadily recovering, the share of first-time buyers continues to decline, and is now at its lowest point in nearly three decades, according to the National Association of Realtors. The home-ownership rate among 30-year-olds has been tumbling, but the fall has been especially fast among those paying off student loans, according to the New York Fed.

So are the soaring costs of college keeping millennials from starting households of their own? Not according to a new paper from Jason Houle of Dartmouth and Lawrence Berger of the University of Wisconsin-Madison. Using longitudinal data on college-going Americans who were aged between 12 and 17 in 1997, the authors found that student-loan debtors were in fact more likely than non-debtors to own a house by the age of 30. But this was mostly because debtors tended to be older, employed, married and with children, and the debt was largely irrelevant.

Others have found that student debt may delay home-ownership, but does not deter it entirely. In an analysis of data from the National Educational Longitudinal Survey, Daniel Cooper and J. Christina Wang of the Federal Reserve Bank of Boston noted that young debtors were less likely to own a home than their debt-free peers. Yet when the authors confined their analysis to college graduates, they found that debtors in their late-20s were more likely to own a home than non-debtors. So the reason for the delay in home-buying among those with student loans seems to have been that many had dropped out before earning their degree.

The decline in young home-owners seems to be part of a larger trend of deferring the conventional trappings of adulthood. The share of 18- to 34-year-olds who are married with children has fallen from 27% in 2000 to 20% in 2015. Several studies have asked whether student debt is nudging youngsters to put off marriage vows and stick to birth control, but the link seems tenuous. As for home-ownership, perhaps the biggest challenge facing young home-buyers is the fact that prices have outpaced income growth for 15 years.

The amount of debt a student has is often less important than the college or the degree. Students with the most debt often have the greatest earning power, as degrees in business, law and medicine tend to be especially costly. The young adults who tend to be most hobbled by their student debt are those who either dropped out or went somewhere non-selective.

There are even signs that taking on more student debt reduces the odds of bouncing back home to live with one’s parents, as long as it results in a degree. In an analysis of longitudinal data on college-going Americans born between 1980 and 1984, Mr Houle and Cody Warner of Montana State University found that the young adults who returned home tended to be younger, underemployed, modestly indebted and from privileged homes. College drop-outs had a particularly high risk of returning to the nest. Every 10% rise in college debt reduced the odds of returning home by around 17%.

Millennials may be sluggish about starting their own households, but college graduates are more likely to do so than their less-educated peers, according to the Pew Research Centre. The earnings of young degree-holders are nearly double those of young high-school graduates. There is little question that the rising cost of college education is a problem, but the cost of not going—or, worse, dropping out—is higher still.