Will Student Loan Debt Sink Housing?
Student Loan Debt By the Numbers
Years after the housing bubble burst and as the economy continues to slowly pick up the pieces, there is another bubble on the horizon. That bubble is student loan debt. In 2013, student loan debt grew to over $1 trillion, surpassing both credit card and auto loan debt. While overall debt continues to fall, student loan debt is increasing year over year. It is almost twice what it was in 2007 and is now second only to mortgage debt.
20 million Americans are enrolled in college each year and of those almost 60% (12 million) take out loans to pay for school. Right now, 37 million Americans have some amount of student loan debt. The largest group with this debt are those under 30. Most borrowers end up paying their loans back into their thirties, making saving for large purchases like a home much harder.
Let’s look more deeply at that $1 trillion in outstanding debt.
- $864 billion of it is federally held
- $150 billion is privately held
Many people are struggling to repay their loans:
- Student loan debt is now more likely to be delinquent than any other major kind of debt, with $85 billion currently past due
- 11.5% of loans are over 90 days past due, or delinquent
- 41% of loans are delinquent at some point during the first five years of repayment
Students who drop out before completing their degree are the most likely to struggle with repayment and the number of drop-outs is growing. Private for-profit two year schools are a major contributor to the drop-out rate. Over 50% of people who enroll in their programs never finish. Those who attended for-profit schools also have a high delinquency rate, over 50%.
Why Are Borrowers Struggling?
One main reason people struggle to repay loans is that they don’t have enough money coming in to the household. Nearly half (48%) of 25 – 34 year old are unemployed or underemployed. 70% of that age group says it has gotten harder to make ends meet in the last four years. Compounding this is that they face high rates of debt. 42% of those under 35 have more than $5,000 in debt that doesn’t include a mortgage. Programs to help make student loan debt repayment affordable are out there, but many don’t take advantage. Of the 1.6 million that are estimated to qualify, only 700,000 people are currently enrolled in an income-based repayment program. The final hurdle facing those with student loans is that the loans are nearly impossible to reduce or eliminate through bankruptcy so the amounts owed follow people for many, many years.
What Does Student Loan Debt Mean for the Housing Industry?
Since the January 10, 2014 inception of new Qualified Mortgage rules, lenders have been wary to make loans that don’t conform to QM guidelines, which require a tight debt-to-income ratio. Young people now carry huge amounts of student loan debt and are subject to high monthly payments. Many question how large the effect of ballooning student loan debt will be on first-time home buyers. The CFPB’s Rohit Chopra has called student debt “one of the more painful aftershocks of the Great Recession”.
In 2011, first-time home buyers were the smallest percentage of total home purchasers since 2006. First-timers are typically 40 – 45% of the mortgage market, but their numbers have shrunk to 35%. Would-be buyers are being held back by low salaries and credit scores. For many, student loan debt payments are a tipping point in their debt-to-income ratio. Without these payments, they might be able to qualify for a QM mortgage, but the added $100 or so in monthly payments is just too much. In another blow to the ability of those with student loans to qualify for mortgages, the FHA is considering doing away with a provision that lets lenders ignore deferred student debt when assessing loan eligibility.
Due to the complexity of the issue, it is hard to forecast what the long term effects of massive student loan debt will have on the housing industry and the economy as a whole. One thing that is for sure is that it will be watched closely in the coming years.
Washington Post – Student Loan Debt May Hurt Housing
American Student Assistance – Student Loan Debt Statistics
Mother Jones – Student Loan Debt Crisis in 9 Charts
Yahoo Finance – Exploding Student Loan Debt
Marketwatch – Rising Student Loan Debt Stopping First-Time Home Buyers