Author Topic: Student Debt Hurts Housing Recovery  (Read 4369 times)

DLJ154

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Student Debt Hurts Housing Recovery
« on: February 18, 2014, 07:09:47 PM »
I saw this article in the Washington Post and could not wait to see it mocked on MMM:   

http://www.washingtonpost.com/business/economy/student-debt-may-hurt-housing-recovery-by-hampering-first-time-buyers/2014/02/17/d90c7c1e-94bf-11e3-83b9-1f024193bb84_story.html?hpid=z2

Poor college graduates can not get approved for $625,000 mortgages off of their $125,000 salaries because of $100 per month student loan payments (along with $450 per month car payments). 

I have paid off over $30,000 of student loan debt over the past 13 months, will be completely out of debt by September, and will be purchasing my first home in December. 

frugalecon

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Re: Student Debt Hurts Housing Recovery
« Reply #1 on: February 18, 2014, 07:32:20 PM »
Congrats on your progress! It is a great feeling to knock out the student loans. Sounds like you are doing a lot right. I wonder if the student loan situation will end up being analogous to what happened with home equity loans in the 2006 -2007 timeframe, when the wheels cam off the wagon.

Of course, one reason the student loans are creating such an impediment to home ownership is that mortgage underwriting has become much tougher.

hoodedfalcon

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Re: Student Debt Hurts Housing Recovery
« Reply #2 on: February 18, 2014, 07:59:36 PM »
Wait...are we mocking the people who took out the student loans or are we mocking the article, or just the example given in the article? I think student loan debt has had and will have a huge impact not only on the individuals who have taken out the loans, but on our economy as a whole. Housing is one example.

On an individual level, I am one of the lucky ones. I bought my house before going to law school, back when interest rates were over 7%. But many years later when interest rates were down in the 3% range and I wanted to refinance? It took me a year to find a bank who would even look at me because of my debt to income ratio, and trust me, it wasn't because of a car payment.

I am still 6 figures in debt from student loans, but I owe less than 60K on my house. That $1200+ I send to my loan company every month could go so many different places. Retirement accounts, investments, rental properties, paying off my mortgage quickly, cars and clothes and stuff (if I was so inclined)...you know, commerce, the economy, etc. It doesn't go to any of those things, and it won't for a very very long time. And I am just one in a sea of thousands.

You can make fun of people who took out massive loans to finance their education. I am one of them. But the impact those loans will have on our economy as a whole are real. So much money is wrapped up in student loans and will be for decades. This has never happened before on this sort of scale. Mock all you want, whatever it is you are mocking. I don't think the article is completely off base, even if you don't like the example they provided. Just my thoughts on the subject.

Cheddar Stacker

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Re: Student Debt Hurts Housing Recovery
« Reply #3 on: February 18, 2014, 08:37:46 PM »
That $1200+ I send to my loan company every month could go so many different places. Retirement accounts, investments, rental properties, paying off my mortgage quickly, cars and clothes and stuff (if I was so inclined)...you know, commerce, the economy, etc. It doesn't go to any of those things, and it won't for a very very long time. And I am just one in a sea of thousands.

Well said for someone with such a dirty, dirty name Mr. Falcon. ; )

It sounds like you have it under control and will be out from underneath your debts in due time. Good luck to you sir.

I agree it will be a huge problem, but the examples were both pretty poor in the article. I think the bigger problem is that our economy will fail to realize a changing consumer. Whether it be from crushing SL debt, other debt, a lack of ambition to earn/contribute to society, or people like mustachians who will shun the very idea of home ownership if it doesn't make the most financial sense. I believe all of these things will cause a decrease in economic activity, and I'm not sure the old guard running things will be deft enough to adapt to the new style.

Maybe it's just the media portrayal of what's happening, but they make it seem like anyone who doesn't want to own a home has just given up on life, or the american dream. I would hope they realize the american dream is changing, and that's not necessarily a bad thing. And I would hope we as a nation are smart enough to build the economy around the next generation rather than hoping they will conform to the old ways.

hoodedfalcon

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Re: Student Debt Hurts Housing Recovery
« Reply #4 on: February 19, 2014, 06:57:24 AM »
Well said for someone with such a dirty, dirty name Mr. Falcon. ; )

It sounds like you have it under control and will be out from underneath your debts in due time. Good luck to you sir.


Ahem. This hoodedfalcon is of the lady variety. MIND BLOWN? I really need to change my username, for so many reasons.

I think you are correct about the changing consumer. A new American Dream is a long time coming, because the old one is killing us. Working at a job you don't enjoy for 30 or 40 years of your life...that is giving up on life. Clawing my way out of debt is going to be the only thing I do for many many years, and I am okay with that. It has taught me a lot about what I value and what I want out of life, even if I did manage to screw that up for myself (for a time, at least).

netskyblue

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Re: Student Debt Hurts Housing Recovery
« Reply #5 on: February 19, 2014, 07:35:48 AM »
I have paid off over $30,000 of student loan debt over the past 13 months, will be completely out of debt by September, and will be purchasing my first home in December.

Where do you live (and what do you do) that you can afford to put a downpayment on a home 3 months after getting out of debt?!


DLJ154

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Re: Student Debt Hurts Housing Recovery
« Reply #6 on: February 19, 2014, 08:07:25 AM »

Where do you live (and what do you do) that you can afford to put a downpayment on a home 3 months after getting out of debt?!


I am an active duty military officer who will be transitioning into the reserves and starting a civilian career in December, so I am eligible for a VA home loan that will not require a down payment.  My wife and I are planning on relocating to Raleigh, NC where we have both already begun job searches and expect to at least maintain (more likely exceed) our current combined annual income of around $80,000.  We also have modest, non-retirement, savings (~$15,000) to help finance any expenses we incur with the move.  I realize this is a somewhat exceptional case.

Wait...are we mocking the people who took out the student loans or are we mocking the article, or just the example given in the article? I think student loan debt has had and will have a huge impact not only on the individuals who have taken out the loans, but on our economy as a whole. Housing is one example.

I think we all can easily mock the examples given in this article because they are pretty ridiculous.  My bigger issue is the image being created for young people when it comes to college and home ownership.  If you do not go to college you are considered a failure and shunned by the community, but if you go and waste 4+ years getting one or more useless degrees you are some kind of hero.  Does the girl in the article really need a college degree to be an administrative assistant?  Why do people think they should be able to go to college, not be able to pay off their loans for twenty years, and deserve a $600,000 mortgage?  Be proactive and find creative ways to pay your debts, whether it be a high paying job or living a mustachian lifestyle, before you begin digging the hole deeper.

Hoodedfalcon I respect you for making $1,200+ payments on your student loan, and also for your user name.  I just don't think there should be people out there making $90 payments on a student loan over 20 years while buying $50,000 cars and $600,000 homes.

Cheddar Stacker

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Re: Student Debt Hurts Housing Recovery
« Reply #7 on: February 19, 2014, 08:46:45 AM »
Well said for someone with such a dirty, dirty name Mr. Falcon. ; )

It sounds like you have it under control and will be out from underneath your debts in due time. Good luck to you sir.


Ahem. This hoodedfalcon is of the lady variety. MIND BLOWN? I really need to change my username, for so many reasons.

I think you are correct about the changing consumer. A new American Dream is a long time coming, because the old one is killing us. Working at a job you don't enjoy for 30 or 40 years of your life...that is giving up on life. Clawing my way out of debt is going to be the only thing I do for many many years, and I am okay with that. It has taught me a lot about what I value and what I want out of life, even if I did manage to screw that up for myself (for a time, at least).

Yes, mind blown! Sorry for that mistake Miss Falcon. If there ever was a name I thought was safe to assume Male it was yours. I can honesty say I hope you never change the name or the text line. I laugh every time I see them.

Starstuff

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Re: Student Debt Hurts Housing Recovery
« Reply #8 on: February 19, 2014, 09:09:38 AM »
"I am an active duty military officer who will be transitioning into the reserves and starting a civilian career in December, so I am eligible for a VA home loan that will not require a down payment.  My wife and I are planning on relocating to Raleigh, NC where we have both already begun job searches and expect to at least maintain (more likely exceed) our current combined annual income of around $80,000.  We also have modest, non-retirement, savings (~$15,000) to help finance any expenses we incur with the move.  I realize this is a somewhat exceptional case."

Your case is absolutely exceptional, so perhaps you should be a bit more tentative in your mocking while deciding to take out a 100% home loan? Frankly, I don't see the decision to buy a house with a 100% loan banking on having at least $80,000 in income a year as any better than buying a $600,000 house with 20% down while holding other debt. I have a cousin who took advantage of this "great program!" and now he and his soon-to-be ex wife are stuck with a house they can't get out from under in an area that has no work for her (they lived near his base).

The mortgage market is ridiculously complex (read: absurd) these days, and even many independently wealthy people won't qualify (I believe MMM has touched on this before when looking for investment properties). And it would be great to say that people should just not take out student loans, but we'd have a lot fewer professionals if that were the case. There are some lenders creating VA-like programs for doctors just because their student loan debt is so crushing that they couldn't really qualify for a purchase otherwise (and these are people making $100,000-$400,000 a year). It's easy to say that people should just rent, but when you're stuck with $3,000 loan payments (using doctors as example again), and rent in your area is two to three times more expensive than purchasing, how are you supposed to go about saving for a down payment or paying of loans at a fast enough rate? This topic is way more complicated than making fun of one example lets on.

TL;DR Student loan debt in contributing to a lot of problems in society, and I don't think it's really fair to mock people for wanting an education despite the cost.

alm0stk00l

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Re: Student Debt Hurts Housing Recovery
« Reply #9 on: February 19, 2014, 09:43:01 AM »
and these are people making $100,000-$400,000 a year

I just wanted to point out this one part. If you are making $400,000/year I find it to be almost impossible that you could have an amount of student loans you could not get out from under in quick order. If a person making that much money would just wait one year, they would easily be able to buy just about any home they wanted. Additionally, you do not have to pay off 100% of your loans to qualify for a mortgage. You just have to get your debt to income ratio low enough.

The thing I do not understand, and I would appreciate someone clearing it up for me, is why you would want to take a $200,000 loan if you already owe someone else $100,000. If you have massive student debt, you decided to buy your future early. It is just as possible to take one or two classes a semester that you can afford and just start your career later, but instead you borrow from someone so that you can get to your career sooner. I think that is a fine thing to do, and I did it myself, but once I graduated my first thought was not "who can I borrow $200,000 from so I can buy a house?" My first though was "how can I pay off these loans so that I can start doing the other things I want to do in life?"

My feelings are you should not want to buy a house you cannot afford if you already bought an education you could not afford. Have a little patience and you will end up with everything you want. It is not that big of a deal to maintain the college life-style for 4 or 5 years after graduation to right your financial ship.

gecko10x

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Re: Student Debt Hurts Housing Recovery
« Reply #10 on: February 19, 2014, 10:23:09 AM »
The thing I do not understand, and I would appreciate someone clearing it up for me, is why you would want to take a $200,000 loan if you already owe someone else $100,000. If you have massive student debt, you decided to buy your future early. It is just as possible to take one or two classes a semester that you can afford and just start your career later, but instead you borrow from someone so that you can get to your career sooner. I think that is a fine thing to do, and I did it myself, but once I graduated my first thought was not "who can I borrow $200,000 from so I can buy a house?" My first though was "how can I pay off these loans so that I can start doing the other things I want to do in life?"

My feelings are you should not want to buy a house you cannot afford if you already bought an education you could not afford. Have a little patience and you will end up with everything you want. It is not that big of a deal to maintain the college life-style for 4 or 5 years after graduation to right your financial ship.

Sure, this makes sense. But it isn't the typical mindset. People don't think about how much they owe and how much it's weighing them down; they think about if the payment is affordable. Plus they aren't properly considering their retirement, so you get a thought process like this:

My student loan payment is $200/mo? That's cool, I can afford that.
I'm contributing [1-5%] to my 401k, so I'm good there.
I still have $1500/mo! I should get a nicer car to go with this new job... $350/mo? Perfect!
I still have $1150/mo! I should look at houses, 'cuz I'm supposed to be grown up now... $1000/mo? Perfect!

That was me until recently. And I considered myself pretty savvy with money... bills were paid on time, debt was under control. As long as you have a balanced budget, you're good! Until you loose your job, or the housing market crashes, or... etc., etc. Then you're hosed.

Starstuff

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Re: Student Debt Hurts Housing Recovery
« Reply #11 on: February 19, 2014, 10:28:22 AM »
and these are people making $100,000-$400,000 a year

I just wanted to point out this one part. If you are making $400,000/year I find it to be almost impossible that you could have an amount of student loans you could not get out from under in quick order. If a person making that much money would just wait one year, they would easily be able to buy just about any home they wanted. Additionally, you do not have to pay off 100% of your loans to qualify for a mortgage. You just have to get your debt to income ratio low enough.

The thing I do not understand, and I would appreciate someone clearing it up for me, is why you would want to take a $200,000 loan if you already owe someone else $100,000. If you have massive student debt, you decided to buy your future early. It is just as possible to take one or two classes a semester that you can afford and just start your career later, but instead you borrow from someone so that you can get to your career sooner. I think that is a fine thing to do, and I did it myself, but once I graduated my first thought was not "who can I borrow $200,000 from so I can buy a house?" My first though was "how can I pay off these loans so that I can start doing the other things I want to do in life?"

My feelings are you should not want to buy a house you cannot afford if you already bought an education you could not afford. Have a little patience and you will end up with everything you want. It is not that big of a deal to maintain the college life-style for 4 or 5 years after graduation to right your financial ship.

I agree with the $400,000 statement, but there are no new doctors who will earn that amount. That's usually a good ten years in, so I was silly to use it in my example. Most start around $100,000-$200,000 at most, and many will never break that amount. I just think it's completely ridiculous that we ask people wanting to enter a profession absolutely necessary to our society to take on in debt as much as we do, then complain that they're overpaid.... (Especially primary care doctors... 2.5-3 times their salary in loans?! But I digress.)

I agree that in most cases if you mortgage your future, you shouldn't also mortgage your living space. But I also see a flip side... In the area I'm thinking of, rent for a three bedroom dwelling is easily $1,200 a month (assuming the need- 2 adults, 1 kid, need for home office), while to purchase right next door would be ~$700 or less a month PITI. And, in my fairly specific example, a doctor will be between 32-40 when they're fully employed, so if they're having kids, they've likely been had, so living like a college student in your mid-30's with kids isn't as easy.

I'm really venting frustration, I think. I've spent a lot of time exploring my passions, and have decided that being a doctor is my future, and is more important to me than retiring early. And it's not a degree you can do a few classes at a time. I don't think it's fair that we're asking professionals, and students in general, to spend so much time schooling, get paid very little after graduation, and then pay of a lifetime of debt. And it's not as easy as saying, "Just don't become a doctor if you can't afford it!" because then we'd be a doctor-less society.... I don't feel like people should have to choose between an important, fulfilling career and the rest of their financial lives.