The doubling of interest on student loans set to take effect July 1 could make it more difficult or impossible for large numbers of young first-time home buyers to qualify for mortgages.
Should student loan interest rates double from 3.4 to 6.8 percent a week from Sunday as scheduled, seven million potential young home buyers with student loans face higher monthly payments and larger student loan debt, both of which could make getting a mortgage more expensive for all and impossible for some.
Higher student loan rates impact future home buyers two ways. They will result in higher payments, as much as $1,000 a year, and also will increase the amount of debt burden that will be calculated in the debt-to-income ratio used by mortgage originators to qualify applicants.
The ideal 33 percent of debt-to-income includes student loan payment, car payment, credit card payments and the monthly mortgage payment, according to an analysis by Selma Hepp, senior economist with the California Association of Realtors. Should interested rates be doubled, she looked at two scenarios. The first one looks at the impact of an average $19,000 loan facing recent California graduates and the second scenarios illustrates the impact of higher student loan debt, $50,000. In both cases, student loan payment increases with doubling of interest. While the average student debt impacts mortgage payment by 2 percent, the larger debt has a 7 percent impact on the mortgage payment. In either case, student loan payments matter in evaluating debt-to-income ratio for potential new homebuyer, Hepp wrote.
The 62 million people echo boomers, currently aged 17 to 31, have been hit hard by the recession, an uncertain job market, no real income growth, tighter mortgage lending rules, and mounting student and credit card debt.
“It is no surprise that some of them do not put priority on homeownership,” Hepp said.
Student loans typically burden graduates for many years after graduation. In a recent study, college seniors who graduated with student loans each owed an average of $25,250, up significantly from an average of $12,750 in 1996. Parents have accumulated student debt as well, $34,000 on average. The aggregate amount of student loan debt in the U.S. is over $1 trillion currently. Between March 31, of this year and 2011, student loan debt rose by $64 billion. However, over the same period, all other forms of household debt fell by $383 billion. Put another way, since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293 billion, while other forms of debt fell by $1.53 trillion.
Yet the echo boomers, or Millienials, are often cited as critical to the long-term recovery of the housing economy. Last week’s State of the Nation’s Housing report from the Harvard Joint Center for Housing Policy, for example, suggested household growth over the next 20 years could potentially spur new home demand to an even greater extent than the Baby Boomers in the 1970s. (See More than a Million New Households a Year Forecast.)