Student debt endangers the American Dream

Paul Buehler’s $60,000 in debt weighs heavy on him. As a Ph.D. candidate in history at the University of Arizona the 31-year-old has spent the last eight years relying on student loans. His debt will become due when he finishes in December. Then his salary will just pay his student loans, he predicts.

But besides the student loans, he and his wife Marne Jones also took out a mortgage to buy a home in New Orleans. “Without my wife, I can’t see a world where I would be able to afford a house on my own,” he said.
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A college degree used to be the ticket to the American Dream – to own your home – but soaring student debt can turn it into a nightmare. The Consumer Financial Protection Bureau in Washington announced in July that Americans hold the record number of $1.2 trillion dollar in student debt. And the number keeps rising. The debt burden will make it harder for millennials to buy a home.

Unlike Buehler’s work in academia, his wife’s better paying job as an attorney allowed them to take out the mortgage. For young professionals on the brink of buying a house, it all comes down to the debt-to-income ratio and earning potential.

After the bust of the housing bubble, mortgage lenders have tightened the money supply. “As part of the loan approval process, we take into account each borrower’s debt obligations, including student loans and other installment loans, to determine if their total monthly debt-to-income ratio meets the applicable standards,” said Tom Goyda from Wells Fargo, which is America’s bigger mortgage lender. The higher your student debt is, the more you should earn – at least if you want to own a house one day.

Holders of educational debt have less access to credit. In 2012 the average credit score for 30-year-old non-borrowers was 24 points higher than for those with student loans, according to the Fed in New York.

A survey by the advocacy group Young Invincibles showed that 15 percent of student loan borrowers were denied a mortgage. With 39 million Americans with educational debt it adds up to a significant number of potential homebuyers.

A study by the Federal Reserve shows that fewer 30-year-olds who held student debt at some point can afford houses. Historically young professionals who took out student loans had higher home ownership rates than other 30-year olds – partly because jobs demanding higher education pay better.

This gap expanded during the housing boom but changed dramatically after the bubble burst. Now 30-year-olds who never held student loans are more likely to own a home than those with a history of student loans, according to the Federal Reserve Bank of New York.

„We hear from young people that they are delaying the decision of large ticket purchases like cars or house,“ said Jen Mishory of Young Invincibles.

Restrained first-time homebuyers could hurt the recovering economy, which was fueled by strong gains in the housing market. But for now, the realtors don’t see a negative effect. Home prices, house sales and construction rates have been doing well in the past year. “The impact of student loan debt is a concern for the future but hasn’t impacted market findings,” said Walt Molony from the National Association of Realtors. According to a report published by the realtors’ organization, 39% percent of the homebuyers were first-time buyers in 2012 and their median age was 31 – a stable figure over the past ten years.

Overall, student debt is escalating at warp speed. Since 2006, the amount has doubled. In the class of 2013, 70% borrowed money, according to a survey from Fidelity financial services. On average, each one owes $35,200.

Responsible for the rising debt is an explosion in higher education costs as state governments spend less on colleges. According to the College Board Advocacy and Policy Center an undergraduate student in 2012 paid on average $29,000 in tuition for one year of private university or college – an increase of 26% in the last ten years.

Tuition costs for state-run public universities saw an even greater rise – 66 per cent – in ten years, to 8,700 dollars.

The vast amount of educational debt lowers the demand for houses. “The student debt, on net, makes it more difficult for these burdened young adults to qualify for mortgage loans, which impedes their ability to buy a home,” said Ken Mayland, economist with Clearview Economics.

And even if they qualify for a mortgage, saving money for a down payment can be difficult when you are making student loan payments and paying rent. “My parents came up for nearly half the down payment. Otherwise we would not have been able to buy the house,” said Jones, who is 31 years old.

With their lack of discretionary income, the couple in New Orleans is concerned not afford all the necessary repairs. “Some of the bigger stuff we are putting off longer than we should,” said Jones. Since they bought the 170-year-old house in the up and coming Bywater neighborhood in 2010, it added about 50% in value. But monthly payments for their loans put that growth in jeopardy as they are forced to neglect maintenance. “It might affect the long term value of the house,” added Buehler.

But will the problem be limited only to those having borrowed money for their education? Or might it hurt the economy overall? Yes, said the Nobel laureate economist Joseph Stiglitz. In a recent op-ed for The New York Times he predicted a negative impact on all of us. „Student debt also is a drag on the slow recovery that began in 2009,“ wrote Stiglitz. „Those with huge debts are likely to be cautious before undertaking the additional burdens of a family. But even when they do, they will find it more difficult to get a mortgage.“