Student loans have a much wider impact than you might expect. Even if you’re making your payments, you may find it tough to borrow more money. Even for a mortgage.
Imagine that you’re a newlywed couple. You’ve been married about eight months and life can’t be better. Both you and your spouse have steady work and a good income. You both have student loans but you’re managing the payments just fine.
Your only downside is that scrawny little apartment you live in. Sure it’s cozy but your friends and family would love to see you move. Plus, you feel like you’re falling behind everyone else. After all, everyone knows that paying rent is throwing away money (at least that’s what they tell you).
You shop for a few weekends and find that perfect first home. You are excited to write the offer because the price is about what you had in mind. But then you apply for a mortgage and are shocked when they tell you that you don’t qualify. Your dream is crushed.
A recent story that appeared on MSN Money bemoans the impact of student loans on home shoppers. The article mentions the scenario that I outline above. Creditors are very cautious today to extend credit, particularly to young buyers. The old rules of qualifying for a mortgage that’s three times your income just by having a job are now gone. These old rules are what caused the crash of 2008 as mortgages went into default in record numbers.
The story also depicts the situation where a borrower took out multiple student loans and missed a payment or two. While managing several payments can be tough and a payment can be accidentally overlooked, lenders are very unforgiving today on missed payments. Those with multiple loans should consolidate into one after they finish school.
This change is the right thing to do. Nobody should borrow money that they cannot repay, and banks should not put people into these situations. But young college grads can find themselves with this unpleasant surprise waiting for them. There are basically two approaches they can take to get out of this situation:
Put as much income as possible towards paying off the student loan. Just because you can pay off a student loan over twenty years doesn’t mean you have to. Even if you can qualify for the mortgage, I strongly recommend getting rid of the student loan first. Taking on a mortgage while you have student loans can put a real strain on a young marriage.
Save up a large down payment while you continue to whittle away at the student loan debt. The larger down payment, coupled with years of steady payments and income, makes a potential borrower more attractive to mortgage lenders.
For parents of middle and high schoolers, let this be a lesson to you and to them. Student loans are more problematic than ever. Not only do kids face this situation as young graduates, but many of them find themselves in jobs where they cannot afford the payments. Remember that student loans cannot be bankrupted either. I recommend that kids and parents work together to avoid student loans altogether and find some other way to pay for college.
Discussion Question – Do you think it should be more difficult for college students to get student loans? Join the discussion!