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Graduate from college, get a job, and save some money to settle down and buy a house. That’s the well-trod path that young people are supposed to follow. Now that road has two big hurdles that could prevent many people from owning their own home. College students and graduates are saddled with almost twice as much educational debt as their predecessors a decade ago, a problem compounded by lower wages for young workers. Add the two together, and what you get is a generation of Americans who may be shut out of the housing market, according to a new analysis by Young Invincibles, which calls itself a non-partisan, non-profit advocacy organization.
When banks write loans, they look at a number of factors, including the applicant’s credit scores and sources of income. A key test they run is what’s known as the debt-to-income ratio, which measures what share of your monthly paycheck goes to paying down your loans. If your ratio is too high, it can be hard, if not impossible, to get a loan.
Banks look at two types of debt-to-income ratios: one that includes just housing expenses (mortgage payments, insurance, taxes, etc.) and another that takes into account other borrowing, such as student debt, credit cards, and car loans. Declining salaries and pay for young workers affects both of the calculations, but it’s the ballooning levels of student debt that will bog down the second ratio for many graduates.
Young Invincibles ran calculations using average housing costs, as well as credit-card and car loan debts for people ages 25 to 34. They then compared what happens to borrowers with different incomes and different student loan balances. They found that single borrowers (who account for more than a third of first-time home buyers) who have median incomes and median levels of student loans would spend 49 percent of their earnings paying down debts—which is well beyond the limits allowed by most lenders. The Federal Housing Administration, the lender of choice for many first-time buyers because it requires smaller down payments, allows just 41 percent of someone’s income to go toward servicing debt, Young Invincibles explains. The situation is similarly difficult for households in which both borrowers have student loans, though it’s easier in a two-income household where only one person has education debt.
In July, Rohit Chopra, the student loan ombudsman at the Consumer Financial Protection Bureau, testified before Congress that of the thousands of comments the agency has received about loans, a “common theme in these stories was the impact of their debt on reaching economic milestones.”
With housing such a large driver of economic growth, the impact goes beyond individual graduates. The growing burden of student debt, which now tops $1 trillion, “could significantly depress demand for mortgage credit and dampen consumption,” the Treasury Department’s new Office of Financial Research wrote in July. In other words, rising student debt could eventually become a problem for the U.S. economy as a whole.