When Millennials learn their student loan debt may keep them from achieving their dream of buying a home, they often react the same way.
“I’ve seen those faces in my office,” said Brian Slivka, the managing broker of RE/MAX Properties’ downtown office in Colorado Springs. “I see disappointment, maybe a little bit of shock.”
About 44 million Americans have student loan debt, averaging about $32,000 for a total of about $1.4 trillion. The average payment for student loan debt is $393 a month, according to a report issued in May by the Federal Reserve System.
That kind of debt can significantly affect credit ratings and a person’s financial future.
“Student loan debt limits their purchasing power,” said Slivka, who has been a Realtor for 15 years. “We talk to a lot of [Millennials] and probably half of them end up thinking that buying a home isn’t going to happen for them in the near future. They know they need to pay down debt or get a raise at their jobs to improve their debt-to-income ratio.”
Still, he keeps seeing young adults come in the office hoping to buy a home.
“They’re not afraid of that debt until they hear their lender tell them their ratios need to come down,” Slivka said. “That student loan debt isn’t stopping their interest in buying, but it’s stopping their purchasing power. When debt-to-income ratio comes up, they just don’t qualify for what they thought they might. They can’t do the $250,000 house; they have to do the $190,000 [house] and that’s difficult to find in Colorado Springs.”
Ent Credit Union Executive Vice President of Lending and Finance Bill Vogeney said the number of young adults buying homes has decreased in recent years.
“Since 2000 the percentage of people under 35 years old [buying a home] has fallen from 41 percent to 34 percent,” Vogeney said.
Why is that?
“It’s the student loan debt,” Vogeney said. “It’s got to have an impact on their buying power.”
He said a potential homebuyer saddled by the average student loan debt of about $32,000 will generally find themselves looking at a less-expensive house or being priced out of the market altogether.
Slivka said with the price point for a home nearing $300,000 in the Springs, most Millennials are finding it a “rough market.”
“A lot of younger folks don’t have money down,” he said. “They’re trying to go in with an FHA [Federal Housing Administration] mortgage — because their credit [rating] is lower or they need a lower down payment — and that makes it hard to compete with a conventional buyer who doesn’t have that student loan debt. It’s deferring the time when they can purchase a home from their 20s to their 30s for most of them.”
The Millennials’ Crisis
Many are calling it a student loan crisis and financial adviser Chris Long agrees. He said drawing a parallel to the mortgage crisis several years ago is valid.
“Credit was easy to get then, just like a student loan is now,” said Long, a partner in Breglio, Long and Associates, a wholly owned firm of Ameriprise Financial.
Tom Binnings, a partner at Summit Economics, said he graduated from college with student loan debt, as did his offspring.
“I have five children and they all had student loan debt,” Binnings said. “When I was writing that check every month, sometimes it felt like a crisis.”
Long said debt hampers the lifestyle of many Millennials.
“It’s so onerous many can’t buy a house because of their debt-to-income ratio,” Long said. “Millennials are growing up and having kids but that debt is holding some of them back.”
John Adams, director of operations at Heuberger Subaru in Motor City, witnesses that scenario almost daily.
“We definitely see potential younger buyers that have student loan debt,” Adams said. “And that can cause some problems for them. Even if a bank or credit union approves their loan, they’re not going to get the best rate because the bank looks at them as a risk.”
That can be the case even if a customer’s credit score is high, Adams said. He noted that debt can positively impact a credit score but the bank will also look at other factors.
“A bank might not approve the loan even if they have a job because they have no credit history and a lot of student loan debt,” Adams said.
According to the Fed’s report, 53 percent of students who earn at least a bachelor’s degree incur some debt.
Total Student Loan Debt: $1.4 trillion
Total U.S. Borrowers With Student Loan Debt: 44.2 million
Student Loan Delinquency Or Default Rate: 11.2 percent
Total Increase In Student Loan Debt In 4Q2016: $31 billion
New Delinquent Balances (30+ days): $32.6 billion
New Delinquent Balances – Seriously Delinquent (90+ days): $31 billion
Fewer than 40 percent of Colorado College students graduate with debt and their average debt is about $20,000, far lower than the national average, according to CC Director of Financial Aid Shannon Amundson.
Graduate school loans account for about 40 percent of the overall student loan debt.
Loans can be forgiven, or minimized, if graduates — such as teachers, doctors or lawyers — work to serve the public good.
“I think that’s a good thing, but it should be tied to income,” Binnings said. “My daughter is looking at getting a law degree and working where some of that [debt could be forgiven]. But if she makes $90,000 should she get it all written off? Not all of it.”
But if she takes a lower-paying job to serve the public good — when she could be making six figures — she deserves some loan forgiveness, he said.
Binnings said student loan debt impacted his generation but nothing like it is affecting Millennials when it comes to purchasing power.
“It may change how we look at education,” he said. “Some may not get graduate degrees because of this. My son chose not to pursue a master’s because he wasn’t interested in having more debt at that time.”
Adams sees Millennials who buy cars taking a similar pragmatic approach.
“Debt is definitely making them more practical,” Adams said. “We definitely don’t see Millennials buying our $40,000 Outback or Forester and part of the reason is they have to manage their debt. They have to set realistic expectations until that student loan debt is paid off.”