Are student loans killing the housing recovery?

From by Ken Maes

There’s a new four-letter word for today’s young adults and it’s spelled D-E-B-T.


Ken Maes, Skyline Home Loans NW

After spending four years or more finishing their degrees, new graduates are suddenly realizing they’re in a financial mess—far worse than those penny pinching college days eating noodles seven days a week. (Many parents are also smarting over that realization.)

Student loans have now exceeded both car loan and credit card debt, and have moved in behind home mortgages as the second largest category of debt, according to a study by the Federal Reserve Bank of New York.

Car loan debt totals $789 billion, credit card debt has exceeded $679 billion and federal student loan debt has jumped 50 percent since 2007 to reach $1.2 billion.

As a father of five children, one still in college, here are some statistics that got my attention:

1. A report from the Institute for College Access & Success reveals that 71 percent of 2013 graduates nationally have an average of $29,000 dollars in student loan debt.

2. In Oregon, the numbers are a little better. The average graduate is $26,639 in debt with 60 percent of the graduates in debt, according to an article in Real Time Economics.

3. From 2008-2012, debt increased per student at an average rate of six percent a year, according to Chris Herbert, research director at Harvard University’s Joint Center for Housing Studies.

4. Federal Reserve figures suggest that the share of borrowers who owe more than $50,000 dollars in student loans has increased from five to 10 percent since 2004.

Is the housing recovery being slowed by this student debt explosion? Absolutely.

“A crucial factor slowing down the recovery has been limited demand for homeownership resulting in part from a slowdown in family formations,” Larry Summers, director of the White House United States National economic council, was quoted as saying in the Real Time Economics article. “That is driven by the overarching life shaping imperative of managing student debts for too many young people.”

So with all that depressing news, is there a way to purchase a home, even if you or someone you know has incurred debt from student loans? You bet.

Many lenders will not count the student loan debt until six months, after graduation. Also, the payments on these loans are much lower than credit card and auto loan payments. Your credit score will improve as well, assuming you pay them on time, which will give you better mortgage rates and lower fees. This will all help make the qualification process for a home purchase much easier.

What are some tips to move forward?

Try to stay debt free on everything else like cars and credit cards. It will be tempting but don’t give in.

Work as hard as possible to limit what you borrow. Debt is a devil to pay off.

Don’t stretch too far on that first home purchase. Smaller is better.

Practice. Before you buy that home, get pre-approved, determine your potential new payment, and set it aside each month with your student loan payments, to see how it “feels” from a cash flow standpoint.

I believe with all my heart that owning your own home is still a big part of the “American Dream As the father of those five wonderful children, and seven awesome grandchildren, I’ve seen first hand what achieving the goal of home ownership has done to enhance their lifestyle and pride. So, scrimp, struggle, and save; it will pay off in the future when you can say two four letter words: Debt free.