Will Student Loans Ruin The Real Estate Recovery?

Student debts have grown like crazy during the past few years and yet there’s no evidence that recent graduates are any brighter, more accomplished or better able to get a job than past collegians. However, what’s patently true is that student debt is piling up and the result plainly impacts mortgage applications.

At the start of 2004 student loans totaled $260 million, debt which increased to $1.16 trillion by the end of 2014.

If we had four times as many college students as a decade ago the vastly-higher level of student debt might make some sense, however that’s not the case. Indeed, over time college enrollments have actually flagged. The Institute of Education Services reports that “the immediate college enrollment rate at 4-year colleges in 2012 (37 percent) did not differ significantly from the corresponding rate in 1990 (40 percent), but the rate in 2012 (37 percent) was lower than the rates in 2011 and 2000 (42 percent each).”

While we’re not getting much bang for our bucks, more student loans have produced one very-visible side effect: It’s harder to buy a house — if not impossible — for millions of potential purchasers.

You can see this with first-time buyers. According to the National Association of Realtors first-time buyers represented 28 percent of the existing-home market in February. The usual norm? About 40 percent.

The mechanics of the problem work like this: Imagine — as most do — that a lender limits the allowable monthly debt-to-income ratio (DTI) to 43 percent of an individual’s gross earnings. Monthly debts include such things as auto loans, housing costs, credit card bills and student debts. If someone makes $50,000 a year or $4,176 per month, then 43 percent of their gross monthly income is $1,792. If monthly school debts are bigger than they used to be then there is less ability to borrow for other things within standard DTI requirements.

Students can largely by-pass the big debt problem by electing to attend community colleges, many of which are excellent, or by joining the military and getting the substantial educational benefits available to qualifying veterans.

Alternatively, some students are taking a different approach. According to The Washington Post, a small number of students have organized a debt strike and are refusing to pay loans owed for attending for-profit colleges, their argument being that the schools allegedly failed to provide promised educational benefits.

Do the students have a case? It’s a good question but not the only concern: The more immediate issue is that student loans are protected by a warren of rules and regulations which make the repayment of such debt virtually impossible to avoid, even with a bankruptcy. The result is that the students are likely to fail in their efforts to avoid the debts while at the same time they will likely face huge credit dings for not making their payments, thus making it more difficult to get a mortgage or car loan.

In many European countries student debt is not an issue simply because students can attend college without paying tuition.

Rather than a debt strike, maybe the better approach is to get a passport and study in Europe. At the end of four years you could wind up with a diploma, no debt, and a very nice collegiate experience.

No doubt more than a few parents might approve of such plans… and even visit.