How Student Loan Debt Affects Home Ownership

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Carrie Pallardy

By Carrie Pallardy

February 1, 2019

Student loan debt is commonly reported as an obstacle to home ownership. The Federal Reserve released a report examining the relationship between student loan debt and the decreasing rate of young adult home ownership. While it can be a challenge, it is possible to balance student loan debt with plans to buy a home.

Student Loan Debt and Declining Home Ownership

From 2005 to 2014, home ownership dropped by 4 percent. The decline was even sharper – nine percent – for people ages 24 to 32 years old, according to the Federal Reserve report. The financial crisis is a significant cause of that drop, but not the only one.

The report examines the relationship between rising student loan debt among young adults and the drop in home ownership. The authors calculate that $1,000 more in student loan debt causes a 1 to 2 percent decrease in home ownership for adults in their late 20s and early 30s.

Looking at the decrease in home ownership from 2005 to 2014, the authors determine that approximately one-fifth (20 percent) of that drop can be traced back to increasing student loan debt. If not for that rise in student loan debt, 400,000 more young adults could have owned a home in 2014, according to the report.

How to Limit the Impact of Student Loan Debt on Home Ownership

People considering home ownership now and in the future can take several steps to minimize the challenge presented by student loans and other forms of debt.

  • Start saving. If you have yet to borrow any student loans, planning in advance is one of the most helpful ways you can prepare for future home ownership. Saving early and often will reduce the total amount you will need to borrow to finance your college education. Common ways to save for college include 529 plans, mutual funds, U.S. savings bonds, Roth IRA, Coverdell Education Savings Accounts and custodial accounts.

    If you already have student loan debt, saving is still an important strategy. You can begin setting aside money each month to save up for a down payment on a home.

  • Watch your credit score. Your credit score is an important factor when it comes to applying for a mortgage and buying a home. Make all of your monthly loan payments on time and in full to avoid negative marks on your credit report. A strong credit score will help prospective homeowners secure a mortgage with a lower interest rate.

  • Manage your debt-to-income ratio. Your debt-to-income ratio is calculated by looking at how much of your monthly income goes to paying off debt, including student loans. A lower debt-to-income ratio will help you borrow more money to buy a home. Make higher monthly payments on your student loan if you can afford it. Pay off any other debt, such as car loans, if possible. You can also minimize debt by paying off your credit card balance each month.

    If reducing your debt is not possible, you can look for ways to increase your monthly income. Can you negotiate a raise at your job? Can you take on a second job or a freelance project?

  • Look at your loan repayment plan. The terms of your loan repayment plan affect how long it will take to pay off your loan and the total amount you will end up paying. If you want to reduce your monthly debt-to-income ratio, you can opt for an income-driven repayment plan or an extended repayment plan. These options can lower your monthly student loan payments. But, remember that reducing your monthly loan payments will require more time and money to pay off the balance of the loan

Student debt does not have to stop you from buying a home, but it is an important consideration. Do your research to ensure you can handle your monthly loan and mortgage payments, as well as your other financial responsibilities.

A good place to start:

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