When this year’s student debt burden surpassed the $1 trillion mark, it became even larger than the amount of debt held on credit cards. New findings now conclude that heavy student loan debt delays the ability of young graduates to buy a home and in the worst scenarios, strips Social Security benefits and even disability income also known as Supplemental Security Income.
“There has been a 46 percent increase in average debt held at graduation from 2000 to 2010. Moreover, total outstanding debt held by the public has skyrocketed 511 percent over the past decade”, according to Denied: The Impact of Student Debt on the Ability to Buy a House, a new research paper by the Young Invincibles, a national youth advocacy group.
The challenges of becoming a homeowner are magnified with student debt. Student loan debt has been rising much more rapidly than salaries for college graduates. When researchers compared salaries of the typical single student loan borrower to the cost of a median-priced house, they concluded that potential borrowers with a student loan and average consumer debt are not likely to qualify for a mortgage. If a married couple carries a double burden of student debt, it becomes even harder to qualify.
Many seniors share the same debt dilemma. According to the Treasury Department in early 2012, people ages 60 and older owed $2.2 million on student loans that were 90 days or more past due. As a result by August 6, Treasury reduced benefit payments on Social Security checks for 115,000 retirees. Legally, the share of benefits withheld can be as high as 15 percent.
In 2005, the U.S. Supreme Court upheld two federal laws that enable the government to take money from federal benefits to make student loan payments. The Higher Education Technical Amendments Act allows the federal government to collect funds without statutory limitations from defaulters. The Debt Collection Improvement Act authorizes reductions in Social Security payments for past due student loan borrowers. The only exemption to this second law is on monthly benefits of $750 or less.
Consumers who owe $60,000 or more on federal student loans are allowed by Treasury to take as long as 30 years to repay the loan. An additional eight years of repayment is allowed in the event of economic hardship or long-term unemployment. In these instances, payments are deferred while the interest continues to accrue.
Consumers with blemished credit scores or those with limited funds for a down payment may seek an Fair Housing Administration (FHA) or Veterans Affairs (VA) financing with down payments as low as 3.5 percent. However these loans can be expensive and typically take a longer time to be approved. Since October 2010 three separate price increases on FHA loans have occurred. The most recent was the addition of an upfront mortgage premium payment announced in April that will add $1,500 in upfront costs for a typical home of $200,000.
The domino effect of debt begins with a student loan and then delays the ability to qualify for a mortgage. With other consumer debt payments such as car loans, and credit cards taking a larger share of net income, the ability to gain wealth is limited if not stymied.
Denied reaches a thoughtful conclusion: “Policymakers who may be unmotivated by individual struggles of borrowers, or unconvinced of the extent of the problem today, would be wise to begin to view student debt in an additional light: as an encumbrance on the recovery of the housing market, and as a result, a potential hindrance to economic growth.”
