Student Loan Debt Can Make Buying a Home Almost Impossible

In the late 1990s, Ed McKinley fell in love with a $65,000 lakeside home in New Hampshire.

The landlords let him move in early and pay rent until the buying process was complete.

Inside his new home, McKinley installed a modern stove, painted the walls, and began redoing the floors.

Then came the bad news.

“The mortgage company decided my income-to-debt ratio was a little higher than they were comfortable with,” McKinley, 59, said.

They were referring to his federal debt of $34,000 in student loans.

He had to pack his bags and leave.

“It’s overwhelming,” McKinley said, choking. “I have a very strong desire to own land that I can put my signature on.”

Ed McKinley

Source: Ed McKinley

Student loan debt has become a major barrier to home ownership in America.

Some 45 million people in the United States have student debt. The average borrower owes more than $30,000, according to Student Loan Hero, a student debt management website. Nearly a fifth owe more than $100,000, according to the National Association of Realtors.

Monthly student loan repayments can eat up much of their income, threaten to drag down their credit score, and make saving nearly impossible — all huge hurdles, of course, to landing in a house.

According to the Federal Reserve, for every 10% of student loan debt a person has, their chances of home ownership decline by 1 to 2 percentage points in their first five years after school.

According to the National Association of Realtors, more than 80% of people between the ages of 22 and 35 with student debt who haven’t yet bought a home blame their college loans.

“Student loan holders want to own a home, it’s part of their American dream,” said Jessica Lautz, managing director of survey research at the National Association of Realtors. “It’s just very difficult to get there right now.”

To be sure, people who get more education also tend to earn higher incomes, perhaps offsetting some of the financial distress of student debt, said Jonathan Spader, senior research associate at the Joint Center for Housing Studies. from Harvard University.

“You have these competing influences of greater access to education versus reduced ability to buy a home due to student loan debt,” Spader said.

First challenge: debt-to-income ratio

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Nearly a fifth of people with debt who apply for a mortgage – like McKinley – are denied because of their ‘debt-to-income ratio’, what a person owes compared to what they earn, according to the National Association of Realtors.

The median income of student borrowers is $59,746, according to analysts at the Harvard Joint Center. For borrowers under 30, the average monthly loan payment is $351, according to Student Loan Hero.

“The bank considers this ‘unsecured debt,'” said Doug Amis, certified financial planner at Cardinal Retirement Planning in Cary, North Carolina. “With a mortgage, you have the assets of the house. If you stopped paying, you could seize the house. But you can’t seize the education.”

In other words: the banks know that you’ll probably be stuck with your college debt until you pay it off.

“The mortgage officer wants to see that your overall housing and debt expenses — including student loans and car payments — don’t exceed 36% of your income,” Amis said. “It’s going to really limit things if you’re only making $50,000 a year.”

In some areas where the cost of living is higher, this debt ceiling is pushed back.

Second challenge: credit score

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According to the National Association of Realtors, eight percent of student borrowers are denied a mortgage because of their credit score.

Mike, a government employee from Yukon, Oklahoma, said banks offering loans would line up at his University of Toledo law school. (He asked to use his first name only because of his government work.) He graduated in 2008, more than $200,000 in debt, during the Great Recession.

He couldn’t find a job and quickly defaulted on his student loans, as 40% of borrowers are expected to do by 2023, according to the Brookings Institution.

He felt helpless.

“I just ignored it, there was no way – they wanted $1,200 a month,” Mike said.

His credit score dropped into the low 500s, which is considered very bad by credit data company Experian.

“If I walked into any bank in Oklahoma, they would laugh at me,” Mike said.

Challenge 3: deposit

And he’s not alone, 85% of student borrowers say difficulty saving has delayed their ability to buy a home, according to the Realtors Association.

“It’s tough with student loans to be able to raise $40,000,” said Grant Simmons, vice president of search marketing for

(The median home price in the United States is $241,700.)

Stephanie Pennycuff graduated from Indiana University-Purdue University Indianapolis with student debt of $43,000.

She works at a non-profit, helping formerly incarcerated people transition back to their communities, earning around $30,000. His monthly student loan payment is $450.

This made hoarding money nearly impossible.

“Almost a paycheck a month goes into loans,” said 28-year-old Pennycuff. “Every time I manage to save a few thousand dollars, something happens and it’s immediately wiped out. I can’t make a payment on a house.”

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As student debt continues to escalate, the primary way many Americans create wealth and stability — by owning a home — is likely to become more at risk.

In the two decades since McKinley’s forced departure, he’s still stuck in renting. His loans have oscillated between defaults and multiplied to more than $100,000.

Sometimes he walks past the house that was almost his.

“There were lots of wildlife, outdoor recreation opportunities,” McKinley said. “It was really beautiful there.”

He imagines what would have happened if he had been able to stay. His monthly mortgage payments were going to be around $500 a month. He might even have paid for them all by now, he thinks.

And the last time he checked, the value of the house had gone from $65,000 to over $200,000.

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