December 15, 2017

Is student debt placing home ownership out of reach?

Community College of Vermont graduates march into the Shapiro Field House at Norwich University in Northfield. Vermont housing advocates worry the rising cost of higher education is making home ownership seem unobtainable. JEB WALLACE-BRODEUR / STAFF PHOTO


It’s almost carved in stone: Get a good education and a good-paying career will follow. While there are no guarantees in life, few would dispute that more education and training increases the likelihood of a better job with better pay.

But that higher education isn’t getting any less expensive. For many, it means taking out loans to cover at least a portion of the cost of a four-year education and beyond.

According to the Consumer Financial Protection Bureau, all those student loans now add up to $1.4 trillion in debt. Of that amount, Vermont students owe $2.8 billion.

The struggle to pay off that debt has ramifications for other sectors of the economy, not the least of which is the housing market.

Student debt has made it more difficult for recent graduates to afford a home, and Vermont is no exception.

Sarah Carpenter, of the Vermont Housing Finance Agency, said it’s her observation that people are waiting longer to buy homes than in the past. Carpenter, the VHFA’s executive director, said there are multiple reasons for someone to delay buying that first home. She suspects one reason is that would-be young homebuyers are saddled with so much student debt, “that they’re just not in a position to buy a home.”

“When you’re starting your first job, you’re probably not in the highest wage, and having that kind of debt can be a real impediment in getting a home loan,” she said.

Carpenter said the average Vermont student debt is $29,000, placing the state in the middle of the pack.

A student with loans to pay off also has day-to-day living expenses, making it difficult to set aside money for a downpayment and closing costs.

“We just know from the national data that student debt is on the rise, and that just makes sense that it would slow somebody down on their decision to buy a home,” Carpenter said.

On the front lines of housing affordability are advocacy groups like Downstreet Housing and Community Development. The Barre-based nonprofit offers a range of services including home ownership and financial counseling.

Eileen Peltier, Downstreet’s executive director, said the problem of student debt is becoming more apparent.

“I think what we’re beginning to see is that some of the people who come to work with us, looking to become a first-time homebuyer, have a level of debt that makes their debt-to-equity ratio not work, so they’re not able to obtain financing,” Peltier said.

The problem is readily apparent when clients walk through the door and don’t have the money for a downpayment, said Kira Charissakis, Downstreet’s housing adviser.

“So, all of their dollars (are) going for the cost of living and paying student-loan bills,” Charissakis said.

Adding to the problem are the entry-level wages most graduates make when they enter the workforce.

There is help available for those who qualify with down-payment assistance.

Peltier said Downstreet can help “piece together” different funding sources. But she also said qualifying for a mortgage assistance program won’t entirely solve someone’s debt-to-equity problem.

VHFA, which offers low-cost mortgages with a 3 percent downpayment, plus closing, also has a downpayment assistance program.

“It allows us to provide up to $5,000 for first-time borrowers, and it’s a zero percent deferred loan,” Carpenter said.

That means the loan isn’t due until the home is either sold or refinanced.

For someone forced to delay or forego the purchase of a home, there are other ramifications.

“The domino effect isn’t just on the individual or the family, but it’s on the community,” Charissakis said, suggesting that if people can’t afford to either rent or buy a home here, they’ll move somewhere else.

Scott Giles, president and CEO of the Vermont Student Assistance Corp., said there is a correlation between education and home ownership.

“Coming out of the recession, I think the really clear thing was that homeownership is really strongly associated now with actually having higher levels of education or training, whether it’s an undergraduate degree or a graduate and professional degree,” Giles said.

He said two groups that find it increasingly difficult to buy a home are people with only a high school diploma and those who started but didn’t complete college or professional training.

“The jobs for individuals with just a high school diploma, by and large, have kind of disappeared and/or the wages have stagnated, so their home-ownership capacity (has) become even more challenging than it was pre-recession,” Giles said.

Based on Federal Reserve data, Giles said college graduates are delaying buying a home at least in part because of student debt. Those with no student debt at age 33 are 6 percent more likely to own a home than someone with a degree who is still paying off their student loan, he said.

According to Giles, those with the most student debt are students who have piled loans on top of undergraduate loans to obtain a graduate degree or advanced professional training.

The federal government is the largest provider of student loans. VSAC also has supplemental loans available to fill the gap between a federal student loan and other financial sources such as grants and scholarships.

Taking on student debt is a double-edged sword of sorts. DeForge said a good education is needed to land a good job. At the same time, she said, borrowers are saddled with so much debt when they leave school, it makes it difficult to keep up with loan payments.

“It’s a huge impact,” DeForge said. “I mean, people have to get an education to get their job, but often the balance isn’t there from what they’re earning — especially early on — compared to what their payments are.”

DeForge said the biggest problem is once they enter the job market, borrowers oftentimes opt for the wrong repayment plan.

She said, while a shorter repayment schedule means paying off a student loan sooner, it also results in higher monthly payments. Although it costs more money in interest in the long run, she said stretching out payments as far as possible also lowers the monthly payments. DeForge said that in turn can make it more likely a borrower will qualify for a mortgage.

DeForge said students looking to advance their education or training need to make the right financial choices and not take on more debt then they have to.

She also sees borrowers in nonprofit occupations who enrolled in the federal debt forgiveness program. Their student debt is wiped out after 10 years, but she said for many borrowers waiting that long to buy a house is too long.

Giles agreed with DeForge that one size doesn’t fit all when it comes to repayment plans.

He said there are a number of different plans available. “Getting in the right repayment plan can have a big impact on the mortgage you can qualify for,” he said.

He said students are routinely put into a 10-year repayment plan, but if that loan is more than $10,000, a borrower may be eligible to repay the loan over 30 years.

The income-based plan limits repayment to 10 percent of income earned above 150 percent of the poverty line, based on the borrower’s family size.

“If you owe more money after 20 years, it’s forgiven,” Giles said. “And these are all strategies for helping borrowers to get their student loan payments down to a level that would allow them to qualify either for a mortgage or for a larger mortgage if they need one.”

While the federal government is the primary lender of student loans, private companies service the loans. Giles said that leads to a gap in the system. He said there’s a difference between “processing payments and actually providing counseling.”

Because the servicer focuses on processing payments rather then counseling, he said, graduates are left “not understanding what their options are.”

Pattie Dupuis, Downstreet’s associate director of home ownership, said the level of debt incurred to obtain an education has become a burden. For many, Dupuis said, that debt has put the American dream of owning a home “out of reach.”


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