A student loan can be your best friend or your worst nightmare. It can lead to an advanced degree that leads to a better job with higher pay and superior benefits. It can also be a millstone of debt keeping you from fulfilling other life goals – such as owning a home.
A recent survey from the National Association of Realtors (NAR) shows how pervasive the effects of student loans can be. According to the survey, 83% of millennials (age 22-35) who don't currently own a home blame the delay on student loan burdens. The average delay in purchasing a home is seven years. Federal Reserve data shows that for every 10% increase in student loan debt, the odds of successful home ownership in the first five years beyond school drops by 1 to 2 percentage points. Given the $1.52 trillion total student loan debt reported by the New York Fed and an average debt of $39,400 for 2017 college graduates (according to Student Loan Hero), it's no surprise that millennials delay home ownership.
Student loan debt is still a burden for many successful homebuyers. NAR found that 40% of first-time homebuyers still have student loan debt, and student loan debtors who purchased a home waited an average of three years to make their purchase.
Active student loans affect potential homebuyers in two major ways. It's difficult for potential homeowners to save up sufficient down payment money, and excessive student debt makes banks less likely to extend credit.
Lenders consider your debt-to-income (DTI) ratio when assessing your ability to repay a loan. The DTI ratio equals your monthly debts divided by your monthly income (before taxes), expressed as a percentage.
Although there are exceptions, a 43% DTI is considered the safe limit for issuing mortgage loans – and many lenders prefer a 36% maximum. According to the NAR survey, 52% of those delaying a home purchase can't qualify for a mortgage due to a high DTI ratio.
Unlike other loans, student loans generally can't be discharged through bankruptcy. There's nothing for student loan issuers to repossess (they haven't figured out how to repossess your education yet). As a result, banks know that you'll be dealing with student loans until you pay them off – or worse, default on them.
Missed payments will drop your credit score, creating a third factor against mortgage approval. Many student debtors end up defaulting on their loans, ruining their credit for years and delaying home ownership even further. According to the New York Federal Reserve, as of the end of 2017, 11% of outstanding student loan debt was either at least ninety days delinquent or in default.
If you are a millennial unable to purchase a home because of student loans, start by reviewing alternate payment options through the Department of Education. Income-driven repayment programs may allow you to lower payments, and therefore lower your DTI.
Your greatest tool for future homeownership is a realistic budget and a willingness to stick to it. If you really want to own a home, make saving for a down payment part of your monthly budget, just as if it were rent and groceries. If possible, make extra payments against your student loan principal to reduce overall debt and save significant interest charges.
Are you willing and able to make the daily sacrifices necessary to buy a home despite a student loan burden? It won't be easy but stay focused. Someday you will hold the keys to your new home, and all your sacrifices will have paid off.