Student Loan Debt Prevents Obtaining Home Loans
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UPDATED: Feb 20, 2012
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As the nation’s student loan debt quickly approaches $1 trillion, it’s no wonder why the low interest rates on home mortgages aren’t providing the expected boost in home sales that experts initially predicted.
Roshell Schenck, a Ph.D graduate with a degree in pharmacy currently earns an annual salary of six-digits, but can’t qualify for a home loan to provide shelter for her daughter and herself, reported Bloomberg. Despite the fact that she makes $125,000 a year, she has more than $110,000 in student loan debt, which is putting a real strain on her income and potential borrowing opportunities.
“I’d love to buy and can afford to buy,” Schenck told Bloomberg.
Willing and able borrowers seem to be a rarity these days, but it seems that even if borrowers have the desire and the funds to purchase a house, banks want little to do with borrowers if they have outstanding student loans.
Since loans used for education are being viewed with greater scrutiny than other types of outstanding financing, Schenck is unable to get approved. “It’s almost impossible for me to get a loan,” she explained. “My debt is crushing my chances of purchasing a home.”
The Trillion Dollar Mark
Because the demographic that makes up most of the “first-time” homebuyers tends to be of the younger generation, they often carry student loan payments. Graduates or not, this higher education financing has found commonplace amongst the nation’s new adults, but as banks are seeing defaults rise, they’re very wary about issuing mortgages to those indebted with these loans.
“Students coming out of college are burdened with more debt than traditionally they have been, and they are also coming into an economy that is underperforming previous recoveries,” said Rick Palacios, a senior analyst at John Burns Real Estate Consulting LLC in Irvine, CA, to Bloomberg. “These things pile on each other and tell us it’s not going to help the housing recovery right now.”
Particularly as the $1 trillion mark comes closer and closer, and experts are predicting a student loan bubble being formed.
“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and rtenders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” said John Rao, vice president of the National Association of Consumer Bankruptcy Attorneys, in a Bloomberg article.
Driving Away the Fix
But cautious or not, driving away first-time homebuyers from the mortgage market is crippling the housing world.
“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” said Ben Bernanke at a homebuilders conference last week, according to Bloomberg. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”
Despite the fact that current student loan borrowers are being turned away from the mortgage market, some remain optimistic.
“The dream feels like it’s farther out of reach than I ever thought it would be,” said Shenck. “[But still,] I haven’t given up hope of one day owning my own home.”