The Connection Between Student Debt and Homeownership

January 11, 2022

Debt is on the rise in the United States. According to the Federal Reserve Bank of New York, U.S. household debt rose to a record-breaking $15.24 trillion in the third quarter of 2021. Housing debt—mortgages and home equity lines of credit—accounted for close to $11 trillion of this debt. However, while more people are buying homes, there is a segment of the population that isn’t reaching this milestone: student borrowers.

A September 2021 report from the National Association of REALTORS found that nearly 30% of student loan borrowers who have yet to purchase a home cite student debt as the reason why. And almost 20% of non-homeowner borrowers believe it will take them an extra eight years to buy a home as a result of their student loans.

As borrowing continues to climb, and federal student loan payments set to resume in May after a two-year freeze, the difficulty of managing student debt and strengthening financial well-being isn’t going to disappear. By understanding exactly how student debt hinders borrowers’ homebuying ability, you will make it easier to show borrowers exactly how your solutions will address this considerable pain point and put them on a path to financial success.

Challenges for Borrowers

A paper published in the January 2020 issue of The Journal of Labor Economics found that “a young person’s [mid-20s] entry into homeownership would be delayed 1 year by an increase of a little over $3,000 in [the average total amount of] student loan debt.”  Recognizing that student debt presents a significant hurdle, let’s look at three specific challenges that borrowers face when it comes to homeownership:

1. Saving for a down payment

On average, borrowers pay $459 toward their student loans each month. As a result, it can be difficult for borrowers to both make monthly student loan payments and build a nest egg for a home. In fact, 47% of non-homeowner borrowers surveyed by the National Association for REALTORS cited their inability to save for a down payment—due to student debt—as the reason why they aren’t able to purchase a home.

2. Qualifying for a mortgage

While the CARES Act has temporarily given borrowers relief from negative credit reporting on their federal loans, the truth remains that many borrowers are struggling to make their payments. An April 2020 report by Pew Charitable Trusts, citing data from the Department of Education, noted that roughly 20% of federal student loan borrowers were in default. 

Missing payments and defaulting on student loans has an adverse impact on a borrower’s credit score, complicating their ability to obtain a mortgage for years to come. And even if a borrower has a strong credit score, the size of their monthly student loan payments can still pose a challenge. Large payments, relative to income, will lead to a high debt-to-income ratio and can make it harder for the borrower to qualify for a mortgage. Since lenders typically look for prospective borrowers to have a DTI of 43% or lower, this is a significant obstacle many borrowers need to overcome. 

3. Qualifying for a homeownership loan

An FHA loan reduces the burden of amassing a large down payment, and, in theory, borrowers with strong credit scores should qualify for one. However, lenders used to calculate a borrowers’ monthly payment as 1% of their outstanding loan balance. This formula often resulted in a payment amount higher than what borrowers were actually paying, leaving many borrowers ineligible for the loan.

This changed in August 2021 after the Department of Housing and Urban Development issues updates to calculation. The new FHA policy now requires lenders to either use a borrower’s actual monthly student loan payment (if above $0) or 0.5% of the outstanding balance (if the payment is $0).

How Summer Can Help Financial Institutions

There’s a straightforward remedy to all three of the aforementioned challenges: lower the borrower’s monthly payments. Reducing the size of monthly payments would be a huge boon to many borrowers’ finances. Doing so would free up cash that could then be saved for a down payment; it would also reduce borrowers’ DTI, making them more attractive candidates for mortgages and FHA loans. And for borrowers who have fallen behind on their payments, smaller monthly payments will make it easier to get back on track and stay there.

This is where Summer comes in with plug-and-play integrated options. Our recommendations engine provides your users with personalized options for lowering their student loan payments, putting them in a better position to use your products as they pursue their financial goals—like buying a home. In this specific scenario, having a lower monthly student loan payment decreases the likelihood that a borrower misses a payment, which, in turn, helps improve their credit score. At the same time, the borrower has more cash to set aside for their down payment and can put that money in a high-yield savings account.

For federal loan borrowers, our technology highlights the income-driven repayment (IDR) plans that are a good fit for their unique financial situation. We also help eligible borrowers take advantage of loan forgiveness programs. And we’ve simplified enrollment for both IDR and forgiveness, so your users can easily get on the path to realizing those savings. Lastly, we also provide recommendations for federal loan borrowers who might be better candidates for private loan refinancing. 

By setting borrowers up for financial success with their student loans, Summer enables them to see past their debt and into their future—with your brand to guide them. Schedule a demo today to learn how a partnership with Summer can help scale your user base, reduce customer acquisition cost, increase engagement, and drive revenue.

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