Is Student Loan Debt Slowing Down The Housing Market?

In most cases a college graduate has higher earning potential than someone with just a high school diploma. In a competitive job market, it’s an advantage to have a degree.

 In addition to showing that you have the education, a degree also tells prospective employers:

• You’re independent and ready to make decisions on your own
• You can handle stress
• You have valuable experiences to bring to the table
• You can work in diverse groups

But with the cost of college rising much faster than the rate of inflation and the overwhelming amount of student debt many graduates face, the question is fast becoming, “Is all this debt I’m racking up for my education worth it?”

Most Millennials don’t understand how many years it will take them just to get back to zero student loan debt and how this will impact their purchasing decisions down the road. Are today’s students aware that there’s a 12.9% unemployment rate for recent grads of film, video and photographic arts majors? Tuition used to be low enough that students could earn enough during the summer to pay for most of it. Now, according to a 2014 usatoday.com article, the average annual cost for undergraduate students attending a four-year college or university in their home state was $18,943. Out-of-state students at those schools paid, on average, $32,762.

A well-educated population used to be seen as something worthwhile for society to invest in, but now it just seems it has become a personal commodity. Most graduates’ first out-of-college jobs are not paying the salaries that new graduates hope for. That is if you can even find a job at all. Thinking that a college degree will automatically earn you a satisfying, well-paying career is far-fetched in today’s world. Tuition at public universities is ever increasing to offset decreased state spending. All these negative consequences of higher education today are bound to affect students who want to experience the American dream of owning a home someday, right?

Not so, according to an article entitled, “Student loan debt is not hurting America's housing market,” published last summer in Fortune magazine. They argue there’s a lack of proof that higher student loan debt is actually causing young people to own homes at lower rates than they did in the past, or that the overall student loan burden is leading to a smaller share of first-time home buyers.

But how can that be considering the main factors that make up someone’s credit score are being affected by student loans? Real life financial scenarios that new grads are facing can prove that ballooning student loan debt can be a prohibiting factor to the purchase of a home. Once you graduate you have about six months until you’re required to make payments on federal student loans. PLUS loans demand repayment sooner, once your loan is fully disbursed. If you’re already struggling to pay your bills, adding payments of tens of thousands of dollars on top of that is going to make it very difficult, if not impossible, to save money for a down payment on a home. On-time payments are a large factor in loan approval.

Next, you have to consider debt-to-income ratio which can, on average, determine about 30% of your credit score. Significant student loan amounts compared to your income will impact your debt-to-income ratio that lenders consider in order to verify how much you can responsibly afford to borrow. If your debt is too high for your income level, you won’t be approved for a mortgage (to estimate your debt-to-income ratio, use this calculator).

Your payment history is also a big factor that lenders consider before loaning you money. Your payment history can account for around 35% of your total credit score. If you’re making on-time payments to your student loans, you’ll be building up a strong payment history. But if you’ve fallen behind on your student loans it could negatively affect your credit score which could prevent you from qualifying for a mortgage.

According to The Wall Street Journal, student debt has tripled over the past decade to $1.19 trillion. In addition, the St. Louis Federal Reserve published a report titled “Student Loan Delinquency: A Big Problem Getting Worse?” The Fed determined that of the nearly $1.3 trillion in non-bankruptcy-dischargeable student loans, the delinquency rate for students in repayment is over 27 percent! In addition, the unemployment rate for college graduates under age 25 hovers around 9.3% according to the Economic Policy Institute. Tuition at many top schools is growing faster than inflation, causing student loan defaults to skyrocket.

So if the decision to lend somebody money depends largely on payment history, outstanding debt and credit history, you be the judge. Maybe a new administration will finally put enough pressure on lawmakers to get serious about fixing paralyzing interest rates on student loans. Until then, maybe tiny house loans would be an option!