Articles

Student Debt-How it Affects a Home Purchase

 

By Michele Karl

 

While many young people and millennials have graduated college and found a job, they are still unable to afford home. Why is this? Student loan debt.

 

The U.S. is saddled right now with $1.4 trillion of student loan debt, 10 percent of all outstanding debt and 35 percent of non-housing debt. This problem isn’t going away as both university pricing and the number of enrolled students continues to climb.

 

As student loan debt rises, homeownership falls, particularly steeply among younger generations. According to the National Association of Realtors Profile of Home Buyers and Sellers, 40 percent of first-time home buyers have student loan debt.

 

Even the graduates burdened with this debt who were still able to complete the home-buying process explained that it added a lot of difficulty to the home buying process.

 

The National Association of Realtors paired with American Student Assistance to understand more about students who are currently paying back their loans and the effect this has on their housing situation, focusing mainly on younger millennials (1990-1998) and older millennials (1980-1989).

 

While those in the survey are now paying their bills on time, 32 percent had defaulted to forbore on their loans previously. These millennials with student loans have explained that this debt impacts most other life decisions, such as their employment, where they decide to live, their continuing education, decision to start a family, and more.

 

If millennials did not have these loans, studies indicate that they would put the money towards investments, a home purchase, or long-term savings. In fact, 83% of millennials who do not yet own homes state that their sole reason for not buying one is because of student loan debt.

 

22 percent were unable to move out of their family member’s home for two or more years after college because of these payments, and 15 percent claim that they still live with friends or family because of the costs associated with university. These percentages were taken only from those millennials who are making on-time payments on their student loans.

 

Frequently, these students have good credit and a stable job, but they are not able to save for a down payment because of their large student loan payment each month. Even 28 percent of those who are able to buy a home claim that their student loan debt is impacting their ability to upgrade to a different home.

 

Out of those surveyed, non-homeowners are delayed by about seven years from buying a home, with over half claiming that they believe it will be over five years before they can afford one. Even existing homeowners claim that they are delayed from purchasing a new home for about three years.

 

Older millennials, ages 26 to 35, are delaying their homeownership the most and are carrying the most debt (about $70,000 to $100,000). Regardless of how much debt they have, the majority in each generation still agree that their student loan debt is delaying their ability to buy a home.

The job market

These millennials don’t seem to be staying at home with family members after college or unable to buy houses out of laziness. In fact, 84 percent of respondents in this survey are working full time. Only eight percent work part-time, and the majority of these part-time workers are looking for a full-time job.

 

However, these jobs aren’t necessarily the ones that they want, and their student loans are forcing them into jobs that don’t coincide with their goals. 32 percent admitted that they are staying at an unhappy job simply to pay off student loans, while another 30 percent claimed that they accepted a job that wasn’t in their field in order to pay off these bills.

 

Additionally, 25 percent were forced to get a second job in order to pay off student loan debt.

 

Student loan borrowers feel like these large price tags for their education have greatly impacted their ability to do many things in life. Over 70 percent believe that they were unable to purchase a home or take a vacation because of the debt, and over 50 percent couldn’t purchase a car, continue with education, or rent solo or change their current living situation.

 

If you look at the older millennial category, 78 percent thought that their ability to purchase a home was impacted by the debt, while 66 percent of the younger millennials agree that their ability to rent solo or change their living situation was affected by their debt.

Is college worth it?

When you look at college graduates, they are much more likely to have a stable job that pays them enough to afford to buy a home. However, when they factor in student loan debt, it starts to heavily weigh on the benefits of a college degree, especially when you consider the interest rates which can be much higher than mortgage interest rates.

 

Because of the trouble with saving for a down payment while paying rent, car payments, and other significant monthly payments on top of their student loan debt, many college graduates simply cannot afford to buy a home, even if they are making above the median U.S. qualifying income needed to buy a single-family home.

 

Although the government-insured FHA loans only require 3.5 percent down, as well as some other low down payment options for first-time buyers, the majority of these loans impose heavy limits on how much debt the borrower can have in relation to their income. That means that high student loan debt rules out this option.

 

What does this mean for you? It is helping to lead to the low inventory problem that today’s housing market has. If young homeowners cannot sell and upgrade their home, and older homeowners are forced to house their adult children so they cannot downsize, the prices of homes continue to rise because of the low inventory.

 

Although the market is beginning to resist these high prices, it seems that millennials with student loan debt still need more time and opportunities before they can buy the homes they want to.

 

Michele Karl is the Owner/Broker of Priority Realty Estate. You can reach her at 865.577.6600 or email her at Priorityrealestatetn@gmail.com