Debt From Student Loans Affects Home Buying, Regardless of Earnings
Even when college graduates are doing everything right, student loan debt is still proving to be a major impediment to achieving financial milestones like home ownership.
Take the case of Roshell Schenck. Schneck, 28, is a 2008 graduate of Lake Erie College of Osteopathic Medicine in Erie, Pa. She has a PhD in pharmacy and earns $125,000 a year. But she also has $110,000 in debt from student loans. And even though she pays her loans on time and can afford a home, she’s unable to qualify for a home mortgage.
“I’d love to buy and can afford to buy,” said Schenck. However, since lenders are scrutinizing debt from college loans more closely than in previous years, she said, “it’s almost impossible for me to get a loan. My debt is crushing my chances of purchasing a home.”
Tighter lending standards in the wake of the recession have been further constricted by almost $1 trillion in outstanding student loan debt. As a result, record-low interest rates have little power to boot housing, especially among younger, first-time buyers, according to a Federal Reserve study submitted to Congress on Jan. 4.
The households most affected by the credit crunch and increased scrutiny of student loan debt tend also tend to have relatively new credit profiles, below average credit scores, and fewer financial resources for large down payments, the report said.
“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben Bernanke said at a homebuilders conference earlier this month. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly” (“Student Loans Near $1 Trillion Hurt Young U.S. Buyers: Mortgages,” Bloomberg, Feb. 15, 2012).
The report said that the number of 29- to 34-year-olds who got a first-time mortgage fell by almost half to 9 percent between 2009 and 2011 from 17 percent a decade earlier, citing the recession’s one-two punch of weaker housing demand and tighter credit. Meanwhile, the average debt load of student loan borrowers increased to $25,000 in 2010, while the unemployment rate for 25- to 34-year-olds held at 9 percent.
The National Association of Consumer Bankruptcy Attorneys referred to the rising debt from student loans as the nation’s next financial crisis and issued a warning on Feb. 7 that said if the “student loan debt bomb” explodes, it would be a follow-up disaster to the housing crash that would especially affect recent graduates, parents who cosigned on student loans, and Americans who have gone back to school for job training.
“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” said John Rao, vice president of the NACBA.
