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Millennials Aren't Buying Homes, but Not for the Reason You Think

May 13, 2015

There's a familiar narrative that the burden of student loans is forcing young borrowers out of the auto and housing markets, crippling their ability to take the same financial steps into adulthood as previous generations.

Think again. A new study from TransUnion says that fears about how much student loan obligations are hindering young borrowers are overblown.

The study looked at consumers aged 18 to 29 who had student loans alongside those who did not, grouped by age and credit score, then tracked their performance on other types of loans in the two years after they started paying off their student debt.

The bottom line: While student loans are way up since the end of the recession, the study found no evidence that such loans are causing young adults to stop opening credit cards, buying new cars, or applying for mortgages. Sure, today's millennials are doing less of all three than 20- to 29-year-olds did a decade ago—but that's true whether they're paying off student loans or not.

According to TransUnion data, the percentage of consumers in their 20s with student debt has jumped from 32% in 2005 to 52% in 2014. The share of student loans in relation to other debt held by young consumers has skyrocketed, too, increasing from 12.9% to 36.8% over the past decade. At the same time, their share of mortgage debt dropped from 63.2% to 42.9%.

But current conventional wisdom about the ripple effect of student debt on other types of borrowing is correlation, not causation, says Charlie Wise, vice president of TransUnion’s Innovative Solutions Group and co-author of the study.

“What we’re trying to do here is cut through the hype and say, ‘what’s the reality?’” Wise says.

The study tracked groups entering repayment at three different times—2005, 2009, and 2012—in an attempt to determine whether performance differed before the recession, immediately following the recession, and more recently as the economy has recovered.

In 2005, a smaller percentage of consumers with student debt had auto loans or mortgages relative to their peers without student loans. But after two years the gap narrowed, and in the case of auto loans, disappeared.

A similar pattern exists for the 2009 and 2012 groups, suggesting that borrowing trends in which individuals with student debt catch up to their peers over a period of a few years have remained steady.

So if student loan debt isn’t causing mortgage and auto loan participation to drop, what is?

Wise points out that about 50% of people aged 18 to 29 have credit scores that qualify them as nonprime borrowers—a percentage that has also held steady since 2005. What has changed, he says, is lending standards, which became stricter in the aftermath of the recession.

The study also shows that young consumers with student debt actually performed slightly better on their new accounts than their peers without student loans.

For example, consumers who started repaying their student loans at the end of 2012 had a 60-day delinquency rate on new auto loans that was 15% lower by the end of 2014 than their peers without a student loan.

The report counters research from a year ago by the Federal Reserve Bank of New York that found home ownership rates dropped more quickly among people aged 27 to 30 who had student debts compared with those who didn’t.

But TransUnion’s findings don't come entirely out of the blue. A recent Wall Street Journal analysis of data from LoanDepot.com found that loan applicants with student loans aren’t any more likely than those without debt to be turned down for first-time home loans.

And some economists, such as Beth Akers, a fellow at Brookings Institute's Brown Center of Education Policy, have pointed out that lower participation in the housing market among individuals with student debt is within the historical norm.

Akers says TransUnion's report that student debt isn't dooming young borrowers isn’t particularly surprising. “Given the fact that financial returns on investment for higher education are positive and large, the notion that debt is harmful to students is a little puzzling,” she says.

Getting clear answers to the question of how debt affects individuals is challenging, though.

Akers points out that you can’t randomly assign debt to people, and since there are significant differences between the backgrounds and demographics of households with student debt and those without, you can't expect their behaviors around buying homes or cars to be the same.

Student loan debt may not be overburdening young consumers on a macroeconomic level, she says, but what's still unknown is the emotional and social cost of carrying such debt.

TransUnion's Wise describes the study's findings as encouraging news. For soon-to-be college graduates, there's evidence that they can stay above water with their loans, and for lenders, there are "credit hungry" millennials who are able to keep up with payments.

Wise's major takeaway for both groups: don't despair.

More on Managing Student Debt:

The 25 Most Affordable Colleges from MONEY's Best Colleges
Why You Might Want to Take Student Loans Before Using Up College Savings
8 Ways to Stop Student Loans From Ruining Your Life

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