Bryan Hanley is a mortgage broker in Brooklyn, N.Y., an area known for attracting young artists, entrepreneurs and families with its farm-to-table restaurants, galleries, boutiques and weekend flea markets.
Still, even in relatively young real estate markets like Gowanus and Williamsburg, Hanley says he doesn't see as many 30-something would-be home buyers getting approved as he would like, and 20-something home buyers are almost nonexistent. A big factor for young applicants? Student debt. He sees student loans in 3 out of 4 applications, and it's not uncommon to see $30,000 to $50,000 in student debt for people working in education, for example, and $80,000 and up for professionals like attorneys.
Student loan debt topped more than $1 trillion as of the end of 2013, according to a report last week by the Federal Reserve Bank of New York, and student debt is now the second biggest source of household debt behind mortgages.
There are concerns that soaring student debt could cripple the housing market, as young workers struggle to save for down payments or qualify for mortgages under their loan burdens. Applications for home purchases have slipped nearly 20 percent in the past four months, according to the Mortgage Bankers' Association, and student loan delinquencies are rising, with those under 30 carrying the highest rate of seriously delinquent loans. Is student debt putting home ownership out of reach?
The perception that student debt is “good” debt is mistaken when it comes to qualifying for a mortgage, Hanley says. “All debt is the same, whether it's $30,000 on an AmEx or $30,000 in student loans. We are only looking at the payment due on the debt each month. It doesn't matter if it's a boat loan or school loan.”
The people who are best qualified for mortgages, of course, are those who have saved up for a nice down payment and have good credit. Paying down expensive degrees can slow progress on a nest egg. Some applicants who are best able to qualify are people who work for the city, Hanley says — police officers or New York MTA (Metropolitan Transit Authority) workers who have gone to cheaper schools and aren't as likely to have graduate degrees on top of undergraduate debt.
Paying down fast
A good way to save for a down payment is to pay down student debt fast — but that's easier said than done, especially when the debt feels overwhelming. The average borrower will graduate $26,600 in the red, and 1 in 10 graduates are leaving saddled with more than $40,000, according to Forbes and the Project on Student Debt.
Jennifer Dunn, who runs her own social media company, paid down $37,000 in debt in just seven months by changing her spending habits. “I could get an iPad or I could pay off some debt,” she says. Eventually she gained momentum and started finding ways to pay down big chunks — such as selling her car. “I had enough cash where I could buy a used car with cash. So that's what I did,” she said.
Ignacio Thayer, co-founder of readyforzero.com, an online service that Dunn used that helps people organize and pay down debt, says student debt has passed credit card debt as the fastest-growing category among the service's clients, who tend to be 20 to 35 years old. Paying down debt can be similar to weight loss, he says. Once you see progress, it's easier to stay motivated.
“It's like when you lose that first 20 pounds and see that you've done it, it encourages you to double down,” Thayer says. It gets exciting when people start paying down their debt the way Dunn did and moving the needle toward debt freedom. “We have seen people sell cars, move in with their parents or rent out their place,” he says.
Another good way to avoid school debt is to save up for school in the first place. Scott Gamm started a blog about financial literacy when he was in college, and the 22-year-old New York University student released a personal-finance book called “More Money, Please,” and works with H&R Block's Dollars and Sense project to teach teens how to manage money.
One piece of advice Gamm gives to fellow students is to save up for college ahead of time, even if it's a summer job to help pay for textbooks or rent. It also helps to get a job while you're in school to pay off interest on loans — which can save you thousands later. “Get a job in a coffee shop and pay for your books, rather than borrowing money to do it,” he says.
Despite the rising cost of education, research continues to show it's still the best investment in your future. A recent study from Pew Research showed that the economic disparity between college grads and their peers continues to widen —college graduates ages 25 to 32 who are working full time earn about $17,500 more annually than those with only a high school diploma.
Still, it doesn't hurt to be careful about how much student debt you're willing to take on; interestingly, some of the brightest and most educated people are ones who get saddled with a lot of debt, says Thayer. He and his partner got the idea for the business because his partner's girlfriend had just finished her doctorate with a ton of debt.
“It can become a corruption of the American dream,” says Thayer. “Young people think, 'I'll make $75,000 when I get out of school; if I have $100,000 in loans, I'll pay that off in two years.' They have no concept how long that's really going to bog them down in the real world.”