Student Loans and the Housing Market

<p>Here's an original idea to get concerned about. The excessive debt taken on on by college graduates will depress the housing market for another decade. Here's an article about it:</p>

<p>The</a> next generation of home buyers has too much college debt</p>

<p>Just when I thought that all the bad news about student loans had come out, I find that there's another way that we'll get hurt.</p>

<p>Wow, what a bad article. Regardless, student loans will not prevent you from buying a home. Standard underwriting on home mortgages is 31% of income to housing and total debt can approach 55% of income for non-conventional loans (translation - good credit and adequate collateral.) Will student loan debt have an impact on the second ratio? You bet. But it will not act as a barrier to ownership unless the borrower has borrowed far too much for college.</p>

<p>To put it another way, if you finish college with $40,000 in loans you can expect to pay about $500 per month. How will that affect you if you're looking to buy a home? Assuming an income of $4,000 per month ($48K per year), the standard housing cost ratio would permit a mortgage payment of $1,200+. Assume monthly taxes and insurance of $300 that leaves $900 for principal and interest. That's a $150,000 loan at 6% over 30 years. Add the $500 to the $1,200 and you get $1,700 or 42.5% ratio. In other words, absent any other significant debt, you can buy a home. You can easily go another $300 up on car payments/credit card payments and still qualify.</p>

<p>If you have a spouse similarly situated, your ability to borrow will increase.</p>

<p>So, yes, student loan debt will have an impact on what you can borrow, but only if you make too little to afford a home or if you borrowed so much that your financial house isn't in order. The sky isn't falling, Chicken Little.</p>

<p>^^I'm not sure what your agenda is or why you need the snarky tone or name calling. The author points out that 60% of loans are in default. That's a lot. That means a lot of people who would ordinarily be in the housing market over the next decade or two will not be, because they got caught up in the college loans scam.</p>

<p>I don't know why you chose to use $40,000 in debt as an example. There are a lot of grads...and non-grads with higher numbers. Anyone reading CC knows of at least one grad who owes $100,000 with no chance of paying it back.</p>

<p>Mortgage applications were down 40% in May. That's bad. The market is already depressed. Any potential buyer who is removed from the market for a decade or more is going to hurt.</p>

<p>I have no agenda, other than trying to talk people off ledges. </p>

<p>60% of loans are not in default as you wrote. 60% are in default or forbearance which means that the author may be including loans for people still in school or who have decided to take advantage of lower rates on student loans by forbearing those and paying less attractive debt. Big difference.</p>

<p>Why do I think the article is over the top? The author calls student loans "predatory" (and you call it a "scam") which is a joke. People may not like the terms of student loans but they're hardly predatory as that term is understood by people who understand the loan business, which I assume the author does given that he's in the real estate business. </p>

<p>As far as agenda is concerned, might one be justified in thinking that the author, a realtor in a precipitously declining housing market in a state on the verge of bankruptcy, in a city that boasts a high level of college graduates (who presumably have lots of loans to pay back) is advocating a policy of self-interest when he suggests that student loans be dischargeable in bankruptcy?</p>

<p>My point is that a student with manageable student loan debt, as I have illustrated, is not shut out of the housing market and a couple with manageable debt certainly is not. Yes, someone with $100K of debt probably is, but someone with that level of debt has chosen the poison. If you allow discharges, the irony is that the irresponsible borrower who took $100K will dodge the debt and the responsible borrower who borrowed $40K (a number I chose because it's $10K annually) will pay back every nickel. I think most sensible people would have a problem with that. I'm certainly not attending the pity party for the $100K in debt women's studies major working in a photography studio and electing to continue deferring her loans, while more interest accrues, to pursue additional studies. </p>

<p>Why does the author deserve the Chicken Little reference? Read his first paragraph:

[quote]
exploded...bubble...culprits...wolves...greed...kool-aid...toxic...crippling...

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</p>

<p>As a student with a bit of a debt problem, the housing crisis has proved most convenient as houses in my area have never been so cheap before. We will probably be able to get into a house because of it, and I don't know if we would have otherwise. In fact, I have friends in their early 20's who are still in school (with no student loans) who have gotten mortgages and purchased houses because cheap real estate is abundant here now. My best friend is now paying less every month in her own house than she was paying when she lived in an apartment.</p>

<p>
[QUOTE]
Wow, what a bad article. Regardless, student loans will not prevent you from buying a home. Standard underwriting on home mortgages is 31% of income to housing and total debt can approach 55% of income for non-conventional loans (translation - good credit and adequate collateral.) Will student loan debt have an impact on the second ratio? You bet. But it will not act as a barrier to ownership unless the borrower has borrowed far too much for college.</p>

<p>To put it another way, if you finish college with $40,000 in loans you can expect to pay about $500 per month. How will that affect you if you're looking to buy a home? Assuming an income of $4,000 per month ($48K per year), the standard housing cost ratio would permit a mortgage payment of $1,200+. Assume monthly taxes and insurance of $300 that leaves $900 for principal and interest. That's a $150,000 loan at 6% over 30 years. Add the $500 to the $1,200 and you get $1,700 or 42.5% ratio. In other words, absent any other significant debt, you can buy a home. You can easily go another $300 up on car payments/credit card payments and still qualify.</p>

<p>If you have a spouse similarly situated, your ability to borrow will increase.</p>

<p>So, yes, student loan debt will have an impact on what you can borrow, but only if you make too little to afford a home or if you borrowed so much that your financial house isn't in order. The sky isn't falling, Chicken Little

[/QUOTE]
</p>

<p>Wow this is some terrible logic. I graduated in 2005 with around $45,000 in college debt and haven't even thought about buying a house yet and probably won't even be able to buy a house until I'm in my 40s. I made $55k per year and never even sniffed close to $4k per month in take home money. After taxes, health insurance deduction, and a meager 5% contribution to a 401k I was only pulling in about $1300 bi weekly. You are right, it was about $500 per month for student loans, but then you have to factor in a car payment, car insurance, gas, clothing, food, and utilities. You are only left with a couple of hundred dollars a month of free money. It makes it almost impossible to save for a down payment. And this is also because I never got sick. Heaven forbid if you ever had a chronic disease or catastrophic injury and had crappy health insurance. You'd be screwed for life. LMAO at paying a $1200 mortgage on a $48k income w/ $40k student loan debt. That's like trying to buy a house and trying to afford a BMW on a mediocre income. It really can't be done.</p>

<p>^^
I'm not going to get into individual financial/tax planning. Suffice it to say that it is clear from your post that you have made choices. I won't fault you for any of those but every choice that you made has an impact on the total picture and surely had an impact on saving for a downpayment and ability to service a monthly mortgage payment.</p>

<p>As far as the disease, injury, etc. argument, yes, if any of those things happen, there will be significant setbacks. I don't understand how that's relevant here, especially given that medical debts are dischargeable in bankruptcy.</p>

<p>@Ema</p>

<p>Yes, you are right. A consequence of the current economy is that entry level buyers are finding less expensive homes and low interest rates. Of course, the buyers need to qualify for financing and banks are being a little tight with lending standards so it's not all rosy for them, but if they can get their finances in order, there's no time like the present to buy a home.</p>

<p>
[quote]
Here's an original idea to get concerned about. The excessive debt taken on on by college graduates will depress the housing market for another decade

[/quote]
</p>

<p>I don't see the logic here and in fact would look at it differently. If we're saying that the current cultural shift in our nation's finances means that those already under a mountain of debt won't be able to take out more debt to buy a house they can't afford then I don't see this as a bad thing... that's how it's supposed to work. </p>

<p>After all it's people taking out loans they couldn't afford that caused the whole housing bubble in the first place. </p>

<p>I don't think those with a lot of student debt (or other debt) will be fully prevented from purchasing a home but they will have to make far more modest purchases than the banks would have allowed previously. However, in the long term that's best for everyone as we all need to live within our means.</p>

<p>
[quote]
But our policymakers would prefer to dig faster, seeking greater access to student loans and increasing Pell Grants. Both will only result in higher tuition and more debt slavery.

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</p>

<p>This is completely false and has been debunked by Congressional and DoE studies over the past two decades - increases in Pell grants and other federal aid do NOT lead to tuition hikes! Neither loan limits or Pell awards have increased significantly in relation to the average tuition increase, although the number of students qualifying or using these forms of aid has. However, if loans were capped for all students - ie. no PLUS loans or private loans over x% of the COA, with x being much less than the current 100 - it may eventually result in schools having to reduce costs and the widespread merit aid discounts and increase accountibility on the part of colleges which is what the Ed bills have attempted to introduce over the past few years.</p>

<p>Another thing the author is missing is that federal student loans are eligible for IBR/ICR which ties the student loan payment to a fairly low percentage of income. Graven makes a good point that the combined tax rate for a single, working, non-homeowner and large increases in employee-borne benefit costs have a significant impact on their ability to save for a downpayment, pay off debt, and qualify for loans. That is a big change from their parent's generation when most benefits were employer paid and any required employee contributions were small or for "extras" like LTD and family health insurance. Those with higher incomes, and often much higher loans, are not allowed to deduct even the interest portion of their student loan payments.</p>

<p>I don't think this will have a huge ongoing impact on the housing market - though perhaps the trend of adult kids moving back home for a few years or parents gifting significant amounts for downpayments will increase as people realize there's no easy way to afford it all and no bailout coming for them!</p>