Higher Education Debt and the First Time Home Buyer

By Victor Normand
Published: April 2014

Last week I got my credit card statement from American Express. The statement showed current balances of $2,540 which will be paid by the due date as I usually do. In the event that I would like to stretch out payment, Amex provides a schedule showing that if I only made the minimum payment of $35, and assuming I did not charge anything else on the card, it would take over 9 years to pay it off and I would have paid them $4,400.

All credit card companies are required to make this disclosure, perhaps student loans should come with similar disclosures. I do remember my daughters having to participate in an online tutorial before getting their student loans approved.   My recollection is that the purpose of the tutorial was to stress the student borrower’s obligation to pay back the loan and what would happen if they did not. No student or parent of a student looks forward to borrowing money, but I am not sure the impact of those loans is fully comprehended on all levels.

Paying off a student loan every month is a great way for graduates to build a good credit score; unfortunately all student debt is included when establishing the debt to income ratio for obtaining a home mortgage. Many first time home buyers, those typically between the ages of 25 and 34, are finding it difficult to buy homes because of their student debt. According to Lawrence Yun, chief economist for the National Association of Realtors, nationally, fewer than 30 percent of all home sales are to these first time buyers. Historically, it should be between 40 and 45 percent.

Currently, student loan debt at over 1 trillion dollars exceeds all credit card debt. Over 70 percent of recent college graduates carry debt averaging $29,400. The simplified example below shows the impact of this debt burden on a young couple each carrying such debt.

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The disturbing aspect of this trend is its direction. Over the past 20 years, student debt has doubled, increasing every year while real wages adjusted for inflation for college graduates has been flat for the past ten years.

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All this is not to say that getting a college degree may not be worth the cost. Lifetime earnings for an individual with a college degree are 70% greater than an individual with only a high school diploma, and the unemployment rate for young college graduates is half that of their contemporaries with only a high school education. Still some full disclosure and a bit of cost-benefit analysis wouldn’t hurt.

As for the effects on the housing market, it is too early to tell. For the time being, in our market, buyers of all ages outnumber sellers so while some first time buyers are missing in action, their absence has not been felt. But in the long run, the inability of these first time buyers to get a stake in the housing market or their delayed entry will have a dramatic effect on their wealth accumulation through home ownership. And that goes to the heart of the American Dream.