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Crushing Student Loan Debt Locks Many Out of the Housing Market

Crushing Student Loan Debt Locks Many Out of the Housing Market By Gina Ragusa
Published May 5, 2014
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Student loan debt has become increasingly more troublesome for first time homebuyers as the National Association of Realtors (NAR) says that student loan commitments is preventing many emerging buyers from pulling the trigger.

NAR’s recent study confirmed that student loan debt was the top reason why potential buyers were not entering the housing market by either delaying house hunting or not even considering a new home purchase whatsoever.

"They're just postponing," Selma Hepp, senior economist with the California Association of Realtors told the L.A. Times. "It's the economy and the recession and what that generation has gone through."

In California alone, first time home buyers typically make up approximately 38% of all home purchases, however that percentage has dropped to 28%.

Dustin Hobbs, spokesman for the California Mortgage Bankers Association told the L.A. Times that the reduction in first time home buyers is a bad situation for everyone.

"You have to have that swath of first-time buyers who will eventually be your move-up buyers," he said. "When you take that out, it damages the whole chain."

Student Debt is Frustrating Gridlock for Many

David Rodriguez, financial educational manager at Generations Credit Union (San Antonio, TX) says that he meets with young buyers and tries to help them through their web of student loan debt.

“Even though we don’t provide mortgage loans, the students we regularly talk to have indicated their frustrations because of the student loan debt they already have,” he says. “They are looking forward to going out into the workforce once they graduate, but the burden of carrying the student loan debt is daunting. They are wary of adding in additional loans, such as mortgages.”

Rodriguez says that he sees firsthand how the impact of student loan debt has cramped the first time home buyer market. “San Antonio has a high number of rental properties which could be an indicator that even though mortgage rates are low, people are still choosing to rent. But it’s also important to remember that San Antonio has a significant population of military personnel so that also drives a high rental market.”

“It’s also important to remember that these students saw the mortgage collapse of 2008 firsthand,” he adds. “So we’ve found that many are fearful of getting themselves into a situation where they could potentially lose their homes. When you couple that with the student loan debt they already carry, it makes them wary of taking that step.” Additionally, Rodriguez says that mortgage lenders have shifted to a much more stringent lending environment due to new regulations. Graduates now face higher down payments and higher closing costs.

Student Loans Through a Credit Union Saves Money

Of course finding the best student loan situation can make the world of difference when it comes time to ultimately paying down debt. Peter LiVolsi, chief lending officer at Georgetown University Alumni & Student Federal Credit Union (Washington, D.C.) says that a credit union like GUASFCU is one of the smartest alternatives to big bank student lending.

“We are very excited to have the opportunity to offer Private Student Loans at GUASFCU,” he says. “Other private lenders offer higher variable rates – for example, PNC’s variable rates start at 3.46% and Discover starts at 3.25%. The government offers Direct Unsubsidized Loans to undergraduates at a fixed rate of 3.86%, but they charge an additional 1.072% origination fee on all loans. The government’s unsubsidized loans for graduate students start at 5.41%, in addition to the origination fee. Federal loans have low fixed rates, but may not offer enough principal to adequately fund student expenses.”

GUASFCU offers a variable rate starting at 3.23% to both undergraduate and graduate students. “Our consolidation rates start at a very competitive 4.90%,” LiVolsi points out. “We do not charge an origination fee, which helps save our members from unnecessary fees. We also offer a 1% interest rate reduction once the borrower has repaid 10% of the loan principal. Our goal is to make student loans as affordable as possible for our members in all of their academic pursuits.”

In addition to competitive rates, GUASFCU also allows members to borrow up to the cost of education minus aid. “Whereas Federal Direct Unsubsidized Loans have a cap at $57,500 for undergraduates and $138,500 for graduate and professional students, GUASFCU offers up to $160,000 for both undergraduate and graduate students and $175,000 for loan consolidation.”

Don’t Forget about Grants, Scholarships and Subsidized Loans

Rodriguez agrees that steering clear of the big lenders is a good idea. “Students should avoid the big lenders that have high overhead costs and large profit margins,” he says. “Seek out a credit union, community bank, or broker and compare mortgage offers to find the best rate. The key to a successful mortgage is to shop around.”

Additionally, he reminds students that grants and any available scholarships should always be the first resort. “It is not an easy task to find them, and it requires a significant amount of research and due diligence, but it is always the best option. There’s not enough grants out there for everyone, but there’s enough for everyone who applies.”

In addition to grants and scholarships, Rodriguez says that students should also explore subsidized loans, which don’t accrue interest while the student is in school. “Students should only borrow what they feel comfortable repaying back. But more importantly, they need to be realistic about what kind of income they can expect after college and how much of that will need to go toward paying off those student loans.”

He adds that changing majors is a fairly common practice, but new students who borrowed their first loan after July 1, 2013 will want to make sure they graduate within a reasonable amount of time. A new student enrolled in a four-year program is only allowed to borrow subsidized loans for six years—after that, only unsubsidized options are available.

How to Approach Home Buying Post Graduation

When it comes time to purchase a home Rodriguez says that students should seek out an experienced Realtor who has knowledge about the local market and is experienced with homes in the buyer’s price range and desired home location.

“It’s also important to seek out a counselor who can walk them through the entire home buying process in advance,” he adds. “Students need to look for reputable credit counseling agencies that are certified to provide Pre-Purchase Housing Counseling. There typically is not a charge associated with this service, and it provides students with the opportunity to get honest feedback and advice from someone who is not trying to sell something.”

“We do our best to minimize our borrowers’ student loan debt by only offering total cost of attendance minus aid,” LiVolsi says. “We also ensure that borrowers and their cosigners have a very strong credit standing when they borrow, because we do not want to put them in a situation where they cannot pay back their loans. As Georgetown University meets full need, we believe that our student borrowers will be well prepared to pay back the debt they take on with our private student loans.”

A vast number of credit unions that offer mortgages also host first time home buyers seminars and ongoing educational programs. These resources are designed specifically for the debt strapped individual in mind, which can be extremely advantageous for those who won’t give up the dream of home ownership.

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