Student Loans burden Potential First-Time Home Buyers

by 05 Mar 2013

As unpaid student loans in the United States pile up and become delinquent, economists are concerned that would-be young homeowners are getting left out of the housing market. According to various financial news outlets reporting on research studies by the New York Federal Reserve Bank and the Pew Research Center, student loan debt is quickly approaching the $1 trillion mark. Nearly 40 million student loan borrowers owe balances from just a few thousand dollars to more than $100,000. The delinquency rate is also troubling: 6.7 million student loan borrowers have not made payments in the last three months.

Homeowners do not expect to see many young buyers knocking on their doors. An economist from the New York Fed explained that those delinquent borrowers may not have a chance to get a mortgage any time soon. Recovering housing markets traditionally rely on young home shoppers to improve home sales, but the staggering amount of student loan debt and delinquency is making things difficult.

A Changing Mortgage Lending Landscape

Things were different for young mortgage borrowers in 2005, when nine percent of those burdened with school loans were able to get a mortgage. In 2012, only four percent were approved in a less upbeat housing market. Mortgage applicants who owe more than $100,000 on their school loans are a rare breed these days since they know that their chances of getting approved are slimmer these days. In many cases, their school loan balances are higher that a typical mortgage.

Mortgage lenders are being less flexible than they were in the past with regard to outstanding student debt, and the current lending environment is particularly challenging for first-time home buyers, most of whom carry school loan debt. First-time home buyers are sorely needed to spark a full housing recovery, but their participation has been minimal this time around.

Dropping Out from the Credit Race

Unless employment opportunities and salaries improve across the United States, student loan debtors may not only stay away from mortgage applications but also from other loans in general. The Pew Research Center reports that American households with members under 35 years of age currently have the lowest debt burden compared to their peers in 1995. These young families are not tapping into too much consumer credit,and 22 percent would be completely debt-free if not for their pesky student loans.


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