If you don't recall your recent college graduation ceremony with fond memories, who can blame you? You sat through hours of speeches over ripe with hope for your future. The commencement speakers said that you could do anything; your prospects for success were unlimited! With your brand-new college degree, you could conquer the world...
But wait. You need a do-over.
Dreams Dashed: College Grads Delay Home Purchases
You're not alone if you feel that the gain of a college degree pales in comparison to the pain of paying off a mountain of student loan debt. If misery loves company, you have plenty of company. Here are some numbers to prove it.
In February, the Washington Post reported that student loan debt has tripled in the last 10 years, to a total in excess of $1 trillion.
According to a 2013 study by the Institute for College Access and Success, 2012 graduates of four-year colleges shouldered student loan debt that averaged $29,400 per graduate. Details include:
- 66 percent of 2012 grads that attended public colleges and universities had student loans; each student carried an average of $25,500 in student loan debt.
- 75 percent of 2012 grads from four-year nonprofit institutions had student loans that averaged $32,300 per student.
- 88 percent of 2012 graduates from for-profit colleges and universities had student loans that averaged $39,950 per student.
Missed student loan payments can lower your credit scores; a poor payment record also affects your ability to qualify for a mortgage. High debt or a sub-par credit score can limit your chances of buying a home, but if you have both high student loan balances and bad credit, you can expect to rent a place (or crash on Mom's couch) for quite a while.
Post Recession Economy Challenges College Grads
Your student loan debt is a big headache, and you aren't sure what to do about it. Neither are those who research and analyze economic trends. One thing seems to be certain; the national student loan debt hangover is likely to get worse before it eases.
As college grads shoulder their student debt burden, look for jobs and try to buy homes, economists have identified more widespread implications of the student loan debt problem.
Economists worry that the numbers of college graduates who carry high student loan balances could impact the economic recovery as fewer graduates can afford to buy their first homes. A shortage of first-time home buyers affects housing markets on all levels, as buyers of more expensive homes typically need to sell their current homes in order to afford larger homes. Without a solid base of first-time home buyers, housing sales would slow down.
The National Association of REALTORS® reports that student loan debt contributed to this spring's lower demand for homes. Would-be homebuyers are shut out of the market because student loan debt renders them ineligible for a mortgage. In general, mortgage lenders require a maximum debt-to-income ratio of no more than 43 percent of mortgage borrowers' gross income. Student loan payments, consumer debt and your new mortgage payment can cause your debt to income ratio to rise like a rocket launched from Cape Canaveral.
Buying a Home After College
It's said that the road to a certain inferno is paved with good intentions. Recent college grads with student loan debt are a great example of this concept. Here's why:
The good news is that you graduated from college. The bad news is that you're buried in student loan debt, and that's not all. Recent graduates have experienced subdued labor markets and lower pay rates; these challenges, when combined with student loans that are payable within months of graduation, can create major financial problems before college grads have careers that allow them to pay down student loans.
The Los Angeles Times reports that more college grads are putting off buying a home; some have no plans to buy a home, especially in high cost metro areas where rapidly rising home prices can make it impossible for buyers with moderate salaries to qualify for a home loan.
The National Association of REALTORS® says that student loans can provide a good way to establish credit, but cautions that missed payments can quickly "tank" your credit standing.
All of this is a bummer if you have huge student loan debt and want to buy a home, but a review of your finances may help you manage debt.
Need Help? Try These Options
First, a word about what not to do. Student loans are different from most types of consumer credit. Most U.S. education loans are provided or guaranteed by the U.S. Department of Education, and are generally not eligible for relief through the bankruptcy court.
List your student loans, the amount and interest rate for each, the creditors/contact information and loan numbers.
If you have not already consolidated your student loans with a U.S. Department of Education consolidation loan, please check it out. For direct consolidation loans made after July 1, 2013, the weighted average interest rate is no longer capped at 8.25 percent. The rate for direct consolidation loans is based on a weighted average of your student loan interest rates rounded up to the nearest 0.125 percent and is fixed for the life of your consolidation loan. You may qualify to consolidate several student loans into one loan with one payment. This reduces the likelihood of missing payments and may reduce monthly payments.
The federal consolidation loan program offers several repayment options including income-based repayment and extended repayment plans.
You may qualify for forgiveness of all or part of your student loans under certain conditions.
Finally, beware of services offering "help" with federal consolidation loans for a fee. The federal student loan and loan consolidation programs do not charge application or consultation fees.