Mortgage

Outside the classroom

Teaching Millennials that student loan debt doesn't have to delay the American Dream

The conversation around student loan debt and its economic impact on Millennials, those born from 1980 to 1998, has some questioning whether the future of the American Dream is in jeopardy. The nation’s student loan debt has soared to $1.4 trillion, surpassing credit cards in becoming the largest source of personal debt outside a mortgage.

And speaking of mortgages, for most people college is still a good, long-term investment in terms of homeownership. About half of all people who went to college own a home by the age of 33, compared with about a quarter of those who didn’t go to college, according to data compiled by the Federal Reserve Bank of New York. Yet, even among the college educated population, homeownership is dropping. 

In fact, homeownership among Americans in their 20s and 30s is hovering near a three-decade low. Just 35% of households headed by someone younger than 35 owned a home in 2017; down from 41% in 1982, according to census data.

Millennials understand the value of owning a home, but according to a National Association of Realtors survey, 48% of younger Millennials, born from 1990-1998, can’t even qualify for a mortgage due to high debt-to-income ratios, potentially making them a lending risk.

Student loan debt is affecting more than just the loan holders too. The survey also found that among all Millennials, 22% were delayed by at least two years in moving out of a family member’s home after college due to the high cost of student loans. 

So what can Millennials do to keep the American Dream of homeownership alive? 

Don’t Default

When faced with overwhelming student loan debt, it may seem like a good idea to just not pay off your loans. What are they going to do? Take back your degree? Many people fall into the trap of ignoring their student loans only to find out later that their credit score, and chances of homeownership, have gone down. 

When it comes to federal student loans, borrowers have 270 days to make a payment before the account goes into default. For private loans, the default policies can vary from institution to institution. Both private and federal loan servicers have the option to sue borrowers who are in default. As much as student loan debts may be impacting Millennials, lawsuits could make things even worse.

Explore “Forgive and Forget” Options

If student loan debt becomes just too much to handle, borrowers should look into their options for having their loans forgiven. Forgiveness, cancellation or discharge of federal student loans means that a borrower is no longer required to repay some or all of the loan. There are typically more forgiveness programs for federal loans than private loans, so borrowers should consult their lenders when exploring their options. 

According to the Office of the Department of Education’s website, the two most common loan forgiveness programs for federal loans are:

  • Public Service Loan Forgiveness (PSLF) Program – If a borrower is working full-time for a qualifying employer, such as a government organization, not-for-profit, Peace Corps or AmeriCorps, this program may forgive the remaining balance on Direct Loans after 10 years. 
  • Teacher Loan Forgiveness Program – If the borrower teaches full-time for five complete and consecutive academic years in a low-income school or educational service agency, and meets other qualifications, they may be eligible for forgiveness of up to $17,500 on Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Federal Stafford Loans.

Understand Debt-to-Income Ratio

When it comes to qualifying for a mortgage, Millennials need to understand what they can afford. DTI ratio is one way mortgage lenders measure a borrower’s ability to manage the payments they make every month to repay the money they’ve borrowed. Student loans, car payments, credit cards and other monthly expenses all impact DTI. Most lenders require a DTI of less than 43%.

It’s important for Millennials to realize how their student loans are calculated when it comes to getting a mortgage. For example, Freddie Mac recently updated how student loans impact DTI. The repayment status of a loan now determines how and what amounts are used for approval.

Getting Over the Down Payment Hurdle 

Educating Millennials on their financing options is a huge step in growing homeownership. For example, many Millennials are unaware that they don’t need to put 20% down when purchasing a home. 

In fact, most are unaware that many banking institutions allow a borrower to purchase a home with as little as 3% down. Knowing this is an option helps take some of the pressure off of Millennials when it comes to choosing between saving for a house and paying off student loans. 

Furthermore, many Millennials fail to realize there are various state and local programs that can assist with closing costs and downpayments. In addition to those programs, to help Millennials stop paying rent and take that next step toward independence, one such option is mortgage insurance (MI). Real estate professionals can explain to homebuyers that MI creates a path to homeownership by allowing them to purchase sooner with less money down. 

It’s important for real estate professionals to share the various differences between FHA-insured loans and conventional loans with private MI. For example, with private MI for conventional loans, once the borrower reaches the 20% down payment threshold, MI goes away and the monthly payments are lowered. With FHA-insured loans, MI lasts the life of the loan.

Buy Now, Pay Later

When looking at the comparison of a monthly payment for owning a home versus paying rent, homeownership gives Millennials the opportunity to stop paying someone else’s mortgage and start paying for a place of their own.  And with rising rental costs and appreciating home values, the savings gap will continue to increase.  

We encourage buyers to make the right decision for them by using tools on achievethedream.com to help calculate the best time to buy, down payment requirements and more. Purchasing a property has other added benefits that go beyond having a place to call home. 

Real estate professionals should remember to share with Millennials that later in life they can use their home equity to refinance their home.  

Home equity is typically a homeowner’s most valuable asset and comes from their interest in a home. Equity can grow over time if the property value increases or as the loan balance is paid down. So, buying a home now could actually help pay off student loans down the road if a borrower qualifies for refinancing. 

With student loan debt playing such a major role in achieving the American Dream, it’s time to focus on sustainable mortgage solutions to get Millennials into homes that build equity for a strong and stable future.

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