Financial counselors at a Springfield home-buying program are increasingly running into a monumental roadblock when they try to help first-time home buyers qualify for a mortgage: student loans.
“In counseling, we actually get down and pull their credit reports for them and look at individual line items with them individually,” said Emily Reiman, a manager at the Neighborhood Economic Development Corp.
The monthly payments on student loans loom, for some, making the income-to-debt ratios required to take out a mortgage impossible, she said.
“It means they can’t feasibly buy a house at all — or it means they can buy less house for the income they have,” Reiman said.
It’s a trend that U.S. Sen. Jeff Merkley, D-Ore., and other lawmakers are hoping to tackle with a proposed Federal Student Loan Refinancing Act. Congress has the power to set student loan interest rates.
Under the bill, borrowers with older, high-interest federal student loans could refinance to a fixed 4 percent rate. Private student loan holders could refinance into a federal program under the same terms.
“Nine out of 10 of the loans in existence right now are above 4 percent,” Merkley said. “Nine out of 10 folks would save money by refinancing — that’s a pretty big deal.”
Any interest rate cut would substantially hurt federal revenues, however. Student loans are a big money-maker.
Increasingly, the quadrupling of the nation’s student loan debt to $1 trillion, up over the past decade from $253 billion, is seen as a peril not only to the students but also to the economy as a whole, according to the Federal Reserve Bank of New York.
“Making payments on student loans uses up a lot of consumers’ income that would have been available for purchasing goods and services,” said Mick Reynolds, chief financial officer of Eugene-based Pacific Continental Bank. “It could prevent them from borrowing. It certainly could prevent them from qualifying for a home mortgage.”
The majority of students emerging from Lane County’s institutions of higher education are carrying student debt, including 69 percent of full-time Lane Community College students and 48 percent of University of Oregon students, according to the Institute for College Access & Success.
The average debt of UO 2012 graduates was $24,528, according to the group. The average debt for LCC students is $11,789, according to LCC.
For people in the “25 to 40 age bracket, we’re seeing student debt that impacts their ability to buy a home,” Reiman said.
Meeting the ratio is difficult
Lenders want to see a total of no more than about 42 percent of a borrower’s monthly income going into debt repayment. A home mortgage would constitute the bulk, at 30 percent of income, followed by payments for credit cards, vehicles, student loans and the like.
For people new in the workplace, meeting that ratio can be difficult.
“Among our counseling clients are people with degrees — and with student debt — who are significantly underemployed, compared to the degree or certificate they actually hold,” Reiman said.
The debt “can bump them right out of the market at least until they get the student loans paid off, which might be five or eight or 10 years down the road,” she said. “That has fairly profound economic consequences for our region and for people.”
That’s what Merkley said he’s worried about.
“We’re seeing that people are delaying their marriages. They’re delaying their independence and living in their parents’ homes because they’re caught in the squeeze between modest wages and very high loan payments,” he said.
The Mortgage Bankers Association and the National Association of Realtors have expressed similar concerns in recent months. First-time home buyers are historically 40 percent of the home buyers market, but in February they were only about 28 percent, said the Realtors group.
Builders also may feel the pinch
Reynolds, the Eugene banker, points to investment analysts such as Jeffrey Gundlach, who is suggesting that it’s time for investors to bet against homebuilders’ stock.
Investors are looking at trends such as the dearth of first-time home buyers on the market, “incredibly depressed” household formation by young people, high youth unemployment, falling inflation-adjusted incomes — and student loans, according to media reports.
“(Loan) payments are pretty steep depending on whether you went to a private college or a public university — even a public university is (expensive),” Reynolds said. “When you get out and you owe $50,000, it’s a little more difficult to start forming households and affording cars and the other little amenities one would accumulate.”
It’s not just housing, Merkley said: “Forty percent of graduates are delaying making a major purchase such as a car. That affects a whole supply chain of parts, dealers and manufacturers.”
The proposed student loan refinance act would make for lower payments.
“If you have $100,000 in loans, which many do, a 4 percent difference is $4,000 a year,” Merkley said. “That’s a pretty significant impact.”
The bill would increase disposable income nationwide by an estimated $14.5 billion in the first year, he said.
New loan rates expected to be higher
Meanwhile, interest rates on new student loans are expected to jump by a percentage point or more based on a system set up by Congress, according to the federal Consumer Protection Financial Bureau. Under current law, however, the rates can’t exceed 8.25 percent for common undergraduate loans, 9.5 percent for graduate loans and 10.5 percent for parents’ loans.
Supporters of the refinancing bill point out that student loans are a money-making business for the federal government expected to generate excess revenues of $127 billion over the next decade — after administrative costs and discounts for defaulted loans, according to the Congressional Budget Office.
Reiman at NEDCO said borrowers could help themselves by limiting how much student loan debt they take on in the first place.
Her nonprofit organization will decide in June whether to launch an education effort locally aimed at would-be college students “so people are going into the financing of their education with their eyes open and a little more knowledgeable about what they’re committing to,” Reiman said.
A college education is still a good economic bet, according to a study released last week by the Federal Reserve Bank of San Francisco. Average college graduates earn $831,000 more in a lifetime than the average high school graduate — although it takes until age 38 to recoup the cost of college, according to the study.
Still, Merkley notes, “parents and high school kids are not sure it’s a smart investment to pursue college because they’re concerned about having future monthly loan payments that are so high they become a millstone around their neck — with loans as high as a home mortgage.”
“It’s not an unreasonable fear because folks are having that experience.”