April 18, 2013 by Leave a comment

student debtStudents Learning Hard lesson About Debt

Once upon a time, in a galaxy (not) so far away, Dad had a job, Mom stayed at home, the mortgage was paid and the kids went to college for their future.

Now, Dad and Mom both have jobs; maybe the mortgage is being paid and if the kids are in college, they better have jobs lined up.

The amount of outstanding student debt is nearly $1 trillion. And a recent report from the New York Federal Reserve shows that debt is having a negative impact on the U.S. economy. The housing market depends on college graduates as a major source of new home buyers.

About 6.7 million of student borrowers, or 17 percent, are delinquent on their payments by three months or more; with the average balance on their loans being above $25,000.

Compounding the problem is that many of these borrowers no longer qualify for home loans. In 2005, nearly nine percent of 25- to 30-year-olds with student debt were granted a mortgage. By late last year, that percentage was down to just above four percent. The hardest hit segment were were those who owe $100,000 or more. A Pew Research Center survey found that the share of millennials who own their homes had fallen from 40 percent to 34 percent during the recession.

Young buyers now make up their smallest share of the housing market in more than a decade. (source CNBC.com)

Credit-rating firm Equifax said $3.5 billion in government and private student loans went bad in the first three months of 2013, the most since the company began keeping track. The U.S. Department of Education said 6.8 million federal student loan borrowers are now in default, representing $85 billion in debt. The Department’s Office of Inspector General found that more than $1.1 billion in defaulted student loans were mired in a system installed in 2011 by Xerox that is supposed to transfer defaulted loan accounts from servicing companies to private collection agencies. Those collection firms have the ability to garnish up to 15 percent of a borrower’s wages. But none of that can happen until the accounts are transferred.

The National Association of Realtors is also concerned and released this letter to Total Mortgage that was recently sent to Richard Cordray, the director Consumer Financial Protection Bureau regarding rules for Qualified Mortgages.

Below are excerpts:

“One significant aspect of the QM standard is a requirement that borrower payments on all debts, including those for their mortgage, car and student loan payments, be 43 percent or less of their total income. Though it may be a reasonable standard in many instances, the continued rise in student debt and the weak labor market may have a long term impact on the ability of many first time homebuyers to qualify under this standard, particularly lower income consumers. Many of these potential borrowers will find their student loan payments are a significant portion of their total monthly debt burden. As a result, many community banks and lenders will choose not to approve mortgage loans to a large number of these responsible and otherwise qualified borrowers. This scenario impacts not only those hoping to purchase their first home, but also homeowners looking to trade up to larger homes or refinance their existing mortgages.”

“The QM rule is the first of several that will impact access to mortgage finance and homeownership levels for graduates with a large amount of student debt. Two other pending regulations may also prevent a younger, debt burdened generation from accessing mortgage credit, based unnecessarily on high down payment requirements.”

Risk Retention and the Qualified Residential Mortgage (QRM)

“Under the proposed QRM definition, consumers unable to save for a down payment due to growing debt burdens will be denied access to the most reasonable loan terms.
In 2011, six regulators proposed a definition of a Qualified Residential Mortgage (QRM) as part of a broader Credit Risk Retention proposed rule as required by the Dodd-Frank Act. The QRM definition included standards that would require a 20 percent down payment and stringent debt-to-income ratio requirements. Should the continued rise of student loan debt impact the ability of responsible borrowers to save for a down payment, those borrowers will be unable to access the most affordable mortgage options. Though a vast majority of borrowers have been responsible and diligent in making their student loan payments, the ability of borrowers to save for many of the same reasons previous generations have including emergency savings, medical expenses, and down payments may become more difficult.”


Steve Viuker is a Brooklyn, New York business journalist.  He has covered real estate, small business and banking for numerous national online and print media.


Steve Viuker is a Brooklyn, New York business journalist. He has covered real estate, small business and banking for numerous national online and print media.

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