As college costs continue to rise, so does student loan debt. In fact, the total amount of debt Americans carry in student loans is $1.3 trillion – the next-highest consumer debt behind mortgages. Once you divide this amount by the country’s population, the average comes out to $3,800 per person. Unfortunately, the largest percentage is placed on the shoulders of Millennials. Out of this group, 70 percent of those participating in the workforce have debt. The average balance is about $37,500 and about seven million individuals have defaulted on their loans.
Although many view student debt as a problem only facing Millennials, its effects have trickled down into the housing market in the following ways.
1. It Delays Purchasing Decisions
For many, student loan debt feels like a small mortgage. As a result, many in the under-35 age bracket have delayed purchasing property. According to a 2015 ASA survey of borrowers, about one in five put off marriage because of their student loans and half said the debt impacted their decision to buy property.
These numbers directly influence another statistic: the fact that homeownership has reached a 50-year low. According to the National Association of Realtors and ASA, 71 percent of student loan borrowers who are not yet homeowners said their debt prohibited them. More than half said they expect their remaining balance to push back purchasing a home at least five years.
2. It Increases Your Debt-to-Income Ratio
It’s not just the perception of debt causing Millennials to avoid buying a home. Rather, loan payments directly impact a borrower’s credit score and debt-to-income ratio.
For an FHA loan, your total debt with a mortgage payment needs to be less than 43 percent of your pre-taxed income. If you’re carrying a large balance, many mortgage programs are off limits.
To get around this, some borrowers may be redirected to extended repayment options, which can lower your monthly student loan payment. However, while this can decrease how much you pay toward your loan per month, not all lenders recognize it.
3. The Debt Decreases How Much Home You Can Afford
Data shows that even qualified borrowers who meet the 43-percent limit with a student loan balance must settle for smaller, lower-cost homes. This can come out to $600 per month with your mortgage payment.
Additionally, the housing market has seen two changes. One, because fewer potential buyers can start families in their 20s and 30s, there is less demand for starter homes.
Furthermore, housing market prices and rates continue to rise. As a result, even what is perceived as a “starter” property seems financially out of reach for those who have not yet paid off their loans.
4. Many Millennials Have No Purchasing Power
Borrowers who have college debt, but did not complete their degree have very little purchasing power. Due to the factors mentioned above, this group of borrowers may have once been able to join the workforce without a college degree and purchase a home, but now struggle to afford property.
A study from Fannie Mae found that college graduates are 27-percent more likely to own a home than non-college graduates. Further, those with a high school diploma and no debt are 37-percent more likely to purchase a home than high school graduates with debt.
5. It Negatively Impacts Your Credit
About 10 percent of student loan borrowers are delinquent on payments. Long term, these add a negative mark to your credit report, which can impact whether you’ll qualify for a loan. In many cases, lenders consider defaulting on your student loans similar to filing for bankruptcy.
Have you paid down your student loans and are now looking to take that next step to homeownership? Why not consider a custom home in one of By Carrier’s Central Connecticut communities? To learn about our properties, give us a call today.
