Student loan payments are holding many Americans back from becoming homeowners by keeping their debt-to-income ratios high. Over the course of 13 years, college tuition increased 81.9%. As a result, homeownership rates among 28 to 34 year olds are dwindling, decreasing from 60% in 2007 to 49% in 2020, according to Zillow. A 2019 survey by Zillow found 39% of potential buyers said student debt delayed their homebuying plans. Student debt nationwide has reached $1.6 trillion and some lawmakers are debating whether or not to eliminate $10,000 for borrowers. Zillow predicts this would bring 1 million borrowers into the housing market.
The debt-to-income ratio (DTI) represents the amount of monthly debt obligations a borrower has relative to their overall income, and just like any other debt, student loans are considered by lenders as part of a DTI calculation that helps determine their capacity to take on additional mortgage debt. Zillow estimated that a $10,000 reduction in the typical student loan burden could potentially allow about 1 million likely student borrowers (those on a standard 10-year repayment track) to more comfortably afford a monthly mortgage payment while adhering to customary DTI thresholds. An additional 171,000 likely student borrowers on an income-based repayment plan could also move within reach of affording homeownership under this scenario.
A Hard Constraint
Credit scores that are rising in tandem with tuition costs and student debt levels suggest that borrowers are finding ways to make ends meet, likely on the back of rising incomes. But debt levels can only get so high before they begin taking a toll on borrowers — especially those borrowers set to take on even more debt in order to purchase a home. At some point, there is no more wiggle room in a household’s budget, and finances are pushed up against the hard constraint of debt-to-income ratios.