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Student Loan Debt, Buying a Home, and Fully Informing Our Youth

October 29, 2018

Many college graduates begin their careers with tens of thousands of dollars in student loan debt, an amount that could take decades to discharge and which impacts one’s ability to secure a loan in order to purchase a home.

In determining a borrower’s eligibility for a loan, lenders utilize a statistic known as the debt-to-income ratio (DTI), or the ratio of one’s monthly debt to monthly gross income. Of course, student loan debt drives up one’s monthly debt and could well interfere with the ability to borrow for major purchases, such as a home.

One useful article on the impact of unpaid (including deferred) student loan debt on procuring a mortgage is, “Why Unpaid Student Loans Can Raise Your DTI,” on MyMortgageInsider.com. One bit of info included is the amount of student debt on first-time home buyers:

Student debt has become a financial curse for many potential home buyers. Last year, the National Association of Realtors estimated that the typical first-time buyer was saddled with $29,000 in student debt while the Consumer Federation of America put the figure at $30,650. The Federal Reserve Bank of New York says student debt at the end of 2017 amounted to $1.38 trillion. That’s up from $550 billion ten years earlier.

Note that these figures do not include any credit card debt, which also affects DTI unless the cards are paid off by closing (the credit card account can still be kept open). (According to ValuePenguin, the mean credit card debt per household is $5,700; if one removes households that pay off debt each month, the mean credit card debt is $9,333.)

The American push to send as many high school graduates to college could well drive increasing numbers of high school graduates into profound debt; I believe this will be a side effect of policies such as the Louisiana requirement that in order to graduate, effective 2017-18, high school seniors need to either complete the Free Application for Federal Student Aid (FAFSA) or file a noncompletion waiver.

The FAFSA includes info on student loan eligibility, and young people viewing those seemingly dazzling dollar amounts might be enticed by the illusion of ready money to leap into debt without any clear sense of even completing a degree.

If America’s college graduates struggle to manage student loan repayment, it seems logical to conclude that nongraduates are more likely to drown in student loan debt; according to the June 2016 Detroit Free Press, college dropouts are four times more likely to default on student loans than college grads.

So, if the college graduates with student loan debt are facing that debt hurdle in purchasing a home, for example, those burdened with student loans and who have no college degree are much less likely to enter a professional life that affords them the ability to manage student loans and afford a home of their own.

If we are advising students to attend college without advising them regarding the means of doing so affordably– including a healthy perspective on accumulating student loan debt– we are guilty of a great disservice to their future financial stability.

Let’s help them stand a better chance of securing that future home loan.

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Schneider is a southern Louisiana native, career teacher, trained researcher, and author of two other books: A Chronicle of Echoes: Who’s Who In the Implosion of American Public Education and Common Core Dilemma: Who Owns Our Schools?. You should buy these books. They’re great. No, really.

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3 Comments
  1. Excellent article Mercedes! And so very important! I manage a RE/MAX office and see this all the time. We have affiliates in our office – a mortgage company and a title company. Its staggering the amount of student debt people owe. That drives up the interest rate and forces them to have to put down a larger down payment – which sadly – they don’t have. If they can’t put the money down – they have to walk away. Its a viscious cycle. Thanks for writing this! So important!

  2. Laura H. Chapman permalink

    I attended college with the aid of “scholarships” that were really loans, with 5% interest from the date of the loan. That loan plus interest would be due if I failed to follow the conditions for full repayment. The loans were from the state of Florida for majors in education and designed to address an acute shortage of teachers. If you graduated in four years and secured a job teaching in a Florida public school, you could be debt-free in four years. Otherwise not. I understand that Devos hopes to dismantle a variant of this idea, the TEACH grant program.

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