College graduates are struggling with student loans so much that it's affecting the housing market – that's according to the Federal Reserve Bank of New York, in its Consumer Credit Panel earlier this year. Student loan debt, including federal and private loans, totals about $1 trillion now. That is higher than auto loan, credit card and home equity debt combined. In fact, student loan debt is the second-largest form of consumer debt, after home mortgages.
Also according to the N.Y. Fed panel, until 2009, having an education typically would result in higher earnings and increase the likelihood of buying a home. Recently, though, that phenomenon has shifted. In 2008, nearly 34% of 30-year-olds with student loans also had home loans, while only 29% of those with no student loans had a home loan. In 2012, the homeownership rate for 30-year-olds with student debt was just over 22%, compared to about 24% for those without student debt.
Mortgage professionals say the increase in student loan debt means these educated earners will delay buying their first home and hamper the housing recovery.
‘It has been widely reported during the economic downturn that professionals were going back to school to get a degree, and there was an increase in the total amount of student debt,’ says Pace Bradshaw, vice president of congressional affairs for the Consumer Bankers Association in Washington, D.C. ‘Without question, there is a whole host of potential homeowners who had an increase in debt.’
The problem, he says, is with the new qualified mortgage rules under the 2010 Dodd-Frank Wall Street Reform Act, set to begin Jan. 10. The new underwriting calls for borrowers' debt-to-income ratio to be 43% or lower.
‘No question – there are going to be some potential homeowners who may not qualify for the mortgage because of the 43 percent debt-to-income ratio,’ Bradshaw says. ‘It remains to be seen if borrowers have 44 percent or 45 percent, what type of non-qualified mortgage market would form.’
Rod Alba, vice president of mortgage finance for the American Bankers Association (ABA), also in Washington, D.C., says it is difficult to tell whether recent college graduates are being turned down for home loans due to student debt. ‘Banks don't report the reason people are turned down is 'x' or 'y' debt,’ he says.
Starting in January, Alba says, it will be more difficult for mortgage lenders to underwrite certain loans. ‘With the new rules, there is a legal order that you have to take all debt into account when you figure out the consumer's ability to repay, and if you get it wrong, you are going to be punished by law,’ he says.
He adds that the ABA is working with Congress and with the Consumer Financial Protection Bureau, but he knows Dodd-Frank is not going to be fundamentally changed.
The federal government has made changes to the student loan program. Congress passed, and in August, President Barack Obama signed into law a measure that would reduce student loan interest rates to 3.9% for undergraduates and 5.4% for graduate students. The new rates are fixed for the life of the loan, but rates for new loans can change, based on the 10-year Treasury note rate.
Not everyone agrees there is a connection between student loan debt and rejected mortgage applications. ‘Our lenders are not seeing evidence of that,’ says Kevin Moehn, program director for iHELP, a private student loan program provided by members of the Independent Community Bankers of America. For its part, iHELP recently launched a private student-loan consolidation program. Graduates of qualifying schools can consolidate all their student loans into one iHELP loan.
Other lenders offer consolidation products, too. ‘A lot of times, banks will work with these borrowers,’ says David Abrahamson, executive vice president of operations for Equity Loans in Atlanta.
The challenge, he says, is earlier in the process, when a recent graduate applies for a mortgage. The would-be borrower's credit score might be low because it reflects a new loan that has had zero payments applied to it. ‘Some loan programs are a little bit more forgiving,’ he says. ‘On Federal Housing Administration and Veterans Affairs loans, if the borrower can show there is a deferment period – as long as the payment is deferred 12 months – technically we don't have to use that in the mortgage qualification.’
As with any mortgage, it helps if the applicant has realistic aspirations. ‘I recall seeing loan applications from people who just got out of college and were looking at $500,000 homes,’ Abrahamson says. ‘We definitely want to get them in houses. That's our mission, and we want to do good lending, but we can't make bad loans in the process.’
Nora Caley is a Denver-based freelance writer.