Student loans are one of the fastest rising sources of debt. Student loans are of increasing concern in light of the regulations pertaining to qualified mortgages that require a consumer to have a debt to income ratio of no more than 43 percent.1
As of the third quarter of 2013, student debt stood at $ 1.027 trillion or about 9 percent of total household debt, up from about 3 percent in 2003. It is now the second largest component of household debt next to mortgage debt.
The net income return from a college education is reported as positive, and those with a college education are less likely to be unemployed and have higher incomes. However, the commitment to pay student debt may mean a pushing back of the timetable to purchase a home to build up savings or purchases of more affordable home. A $25,000 student debt reduces the potential homebuyer’s borrowing ability by about the same amount2. For the millennials, the home purchase may be pushed back by about seven years.
What does this mean for REALTORS®?
REALTORS® may need to work with the client in understanding and addressing student debt constraints:
1. Working with the buyer to get an overall financial picture of what can be done.
2. Looking for alternatives may be necessary—rentals, rent to buy, assuming a mortgage, exploring financial options.
In conclusion, the increasing level of student debt appears to be of rising concern, especially in light of regulations pertaining to ability to repay and qualified mortgages. REALTORS® may need to provide some insight on options for addressing this issue.
1 Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z). A qualified mortgage is a mortgage that provides protection to creditors from liability pertaining to a consumer’s inability to repay a loan.
2 A $25,000 student debt translates to a monthly payment of about $285 at 6.6 percent interest payable over 10 years. The present value of these payments at mortgage rate of 4.1% in 2012 is $ 28,031. At 90% LTV, the amount borrowed is $25,228.72