Are Student Loans Preventing Millennials from Buying?
Millennials are on track to becoming the most educated generation in history. This means they are also the generation with the most student debt. Depending on the type of degree earned, as well as the prestige of the institution attended, there are some Millennials who graduate college with what equates to a mortgage payment. But that’s not the case for all.
Here are some statistics about the average college graduate & their student loans:
• The age of the average college graduate is 22 years old.
• The average student graduates college with $25,000 in student loan debt.
• The terms of the average loan are 10 years, with a monthly loan payment of $280, and an interest rate of 6.8%.
Looking at these stats, the average college graduate has what amounts to a 10-year car payment after graduation.
According to NAR’s Generational Study, 44% of all Millennial homebuyers in 2016 purchased their homes while still paying off their student loans. Although this is a larger percentage than the 25% of all buyers who had student debt at the time of their home purchase, the distribution of the amount of debt is consistent with all buyers.
“With student debt on the rise, there’s been a lot of speculation about whether the cost of a college degree hurts an individual’s ability to buy a home,” says NerdWallet’s Chris Ling.
“From what we’ve seen, getting a four-year degree or higher is actually positively associated with homeownership — even when accounting for debt.”
Thousands of ‘Older Millennials’ are reaching the 10-year mark after college and paying off their student loan debt every day. Many more who may have graduated with more than average debt are one or two years out from being able to lift that financial burden, and are daydreaming about what the future will bring.
44% of homebuyers in 2016 had student loan debt at the time of purchase.
In NAR’s Student Debt & Housing Report, 18% of those with student loans were already homeowners.
Many took advantage of the first-time homebuyers’ credit and are now looking to sell their homes and move on to accommodate their more ‘grown up’ lives. For example, some may now be married, with a better job, possibly with kids or one on the way, or aging parents that they will soon need to accommodate. “With student debt on the rise, there’s been a lot of speculation about whether the cost of a college degree hurts an individual’s ability to buy a home,” says NerdWallet’s Chris Ling. “From what we’ve seen, getting a four-year degree or higher is actually positively associated with homeownership — even when accounting for debt.”
Is Earning a Degree worth the Debt?
According to a study by the Brookings Institute, the dividing line between haves and have-nots in homeownership is “education, not student debt.” “This picture accords with what we know about the growing gulf in the economic fortunes of those with and without a college education. Men with a BA earn $35,000 more a year than those without, while for women the gap is $25,000.” A study by Fannie Mae supports this fact as they go on to say:
“Those who completed at least a bachelor’s degree without student debt were 43% more likely to be homeowners than high school graduates who didn’t attend college and don’t have student debt.”
The College Board reports that “the typical bachelor’s degree recipient can expect to earn about 66% more during a 40-year working life than the typical high school graduate earns over the same period.”
Millennials are delaying the social norms that many generations before them had set. According to NAR, Millennials who purchased a home last year delayed their home purchase by a median of 3 years, with 53% of those who delayed their purchase citing student loans as the debt that held them back the most.
Student loans have only delayed their ability to own their own home, not taken away the desire to do so.
Reasons Those with Student Loans Are Delaying Buying a Home:
• 78% - Can’t save for a down payment because of student debt
• 69% - Don’t feel financially secure enough because of existing student debt
• 63% - Can’t qualify for a mortgage due to debt-to-income ratio (DTI)
• 47% - Can’t afford their preferred house or neighborhood
• 19% - Don’t have the financial know-how to confidently navigate the housing market
Seems like there is some work to be done to educate those with Student Loan debt that they may be disqualifying themselves and may be able to buy now:
Can’t save for a down payment – What size down payment do they think they need?
Can’t qualify for a mortgage due to debt-to-income ratio (DTI) – There is a big difference between your front-end DTI and your back-end DTI. The front-end DTI measures the amount of your monthly income that you will be spending on your mortgage payment. The back-end DTI takes into consideration your entire monthly expenses (or debts) in comparison to your monthly income.
According to Ellie Mae’s Origination Report, loans closed over the last year had an average front-end DTI of 25% and an average back-end DTI of 39% which is much higher than many believe they need.
The last one is where your agent comes in: Don’t have the financial know-how to confidently navigate the housing market - Your agent should be your strategic partner throughout the home buying process. He or she is there to answer your questions and put your mind at ease about the big decisions that you will be making in order to make your dream of owning a home come true!
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