If you’re a Millennial and attended college, there is an excellent chance student debt is part of your financial life. Total U.S. student loan debt surpassed $1.3 trillion and now affects some 40 million Americans. The percentage of individuals between the ages of 25 and 34 who have $50,000 or more in student loan debt doubled between 2005 and 2015. Meanwhile, the amount of mortgage debt held by this age group fell by half.
As pervasive as student loan debt is, it doesn’t need to define your future or keep you from reaching your homeownership goals.
How to Move On With Student Debt
Buying a home and repaying student debt are not mutually exclusive. The key to achieving both goals is balance. Here are seven tips for finding that middle ground within your own household’s finances.
Know your options.
You have options regarding your repayment programs if your debt is federal and your loans aren’t with a private lender. You also have the ability to switch repayment programs as your income, financial circumstances, and goals change. Visit the Department of Education’s website for a rundown of the repayment programs.
Look beyond interest rates.
Student debt management isn’t so much about the lowest interest rate as it is finding the most affordable repayment option. That affordability is what allows you to meet financial goals in addition to repaying your student loan debt.
Student loan debt can interfere with home buying if you have a history of late or missed payments. Payment history accounts for roughly 35 percent of your credit score. Timely payments and demonstrating your ability to handle the repayment of debt are actually positive attributes on a credit profile.
It's all about DTI.
From a Loan Officer’s perspective, it’s not about how much you already owe as it is about the ratio of that debt to your income (DTI). There are two ways to improve this ratio. The first is the one that many focus on: reducing your debt level. However, increasing income through a better job, freelancing, or having a nonworking spouse go back to work part time can also help you qualify for a mortgage.
Take advantage of your first time buyer status.
There are a number of first time homebuyer programs that can help you qualify for a mortgage. These programs may offer low to no down payment requirements, which makes owning a home and repaying student loans doable. Also, various loan programs will treat student loan debt differently when approving applications. Get advice from a Loan Officer to see which program may be appropriate for you.
Many municipalities and, increasingly, corporations are offering student loan repayment programs as an employee benefit or as an enticement to locate to underserved areas. When looking at your employment options, consider how having access to such benefits might impact your ability to achieve your financial goals sooner.
Think after tax.
Take a holistic look at your current spending on an after-tax basis. Focusing on being free of student debt may sound good, but pouring your money into loan repayments while paying rent may actually be costing you more money depending on where you live. Under the current federal tax laws, mortgage interest is tax deductible for most filers. The tax savings, especially if it comes in the form of a tax refund, could help you retire your student debt even as you build your home equity. It’s a good idea to consult a tax professional to help you decide.
Don't let student loan debt stand in the way of your homeownership goals!