It’s no secret that student loans are preventing millennials from reaching traditional adult milestones. But, as of yesterday, new proof has come out showing how much millennials’ debt is affecting the economy.
According to the Federal Reserve Bank of New York, the combination of increasing tuition and student loan debt could be responsible for up to 35 percent of the decline in homeownership for people aged 28 to 30.
Even if student loan debt itself doesn’t prevent millennials from owning real estate, rising delinquency rates on the loans can. As we’ve previously reported, student loan debt delinquency is up to 11.2 percent. That could mean lower credit scores and a lower likelihood of being approved for a mortgage.
So what can you do if you’re a millennial in debt hoping to purchase a home in the next few years? Read on to find out.
Why fewer millennials are homeowners
To understand the relationship between indebted millennials and real estate, the Federal Reserve Bank of New York studied nine groups of people who graduated between six and eight years ago. The reason? To discover their homeownership rates by the time they turn 28, 29, and 30.
What they found was that the increase in college tuition from 2001 to 2009 likely contributed to a decline of 11 percent in homeownership for this age group.
What’s more, the data concluded that a mean increase of debt per capita of $5,707 from the years of 2003 and 2011 has contributed to a 35 percent decrease in homeownership for people aged 28 to 30.
While this report shows the impact millennials’ debt has on their ability to become homeowners, it’s also important to look at the various ways the debt can have that impact. In the relationship between millennials and real estate, it’s complicated.
First of all, if you’re paying high student loan debt bills each month, you might find it nearly impossible to save for a home down payment. Although your regular, on-time payments are helping your credit score grow, the lack of a down payment is forcing you to remain a renter.
And if your student loan bills are so high that you can’t afford to make the payments each month, then you may face student loan delinquency or default. And that can lead to a downward spiral that’s hard to get out of — both financially and for your credit score.
No matter which situation you’re looking at, you have the power to turn things around. It’s all in how you manage your student loan debt.
Saving for a home while paying student loans
Paying off your student loans might seem downright impossible, much less working to save for a home while you do so. But luckily, it can be easier than you think. You simply have to approach your student loans strategically.
Here are four steps to help you achieve homeownership while wrangling your student loan debt.
1. Refinance your loans for a lower interest rate
If you have good credit and a solid student loan payment history, you can create wiggle room in your budget for a home down payment by refinancing.
If you refinance your student loans, you can get a lower interest rate. That means more of your payment will go to your principal balance. You can also decide to either increase your repayment terms to lower your monthly payments or take on a shorter repayment period to get out of debt faster.
What you decide is up to you, but if you want to own a home sooner rather than later, then taking on a longer repayment term could lower your monthly payment enough to let you significantly increase your rate of savings for a down payment. Just remember that will extend how long you have student loan debt.
If you’re consider refinancing, be sure to research the top refinancing lenders for student loans for the best rates and terms.
2. Use income-driven repayment if you’re struggling to pay
If you’re just barely making your payments each month and fear you might end up in default, then it’s time to take advantage of income-driven repayment plans.
These plans are useful because they lower your payments to a certain percentage of your income. They also make you eligible for forgiveness after a certain amount of years. If an income-driven repayment plan lowers your payments enough, you might even be able to put more money each month toward a home down payment.
Keep in mind, if you have private student loans, you can’t put them on an income-driven repayment plan. Still, if you are experiencing financial hardship, speak to your lender about your options.
3. Open a separate savings account for your down payment
Once you’ve chosen the right strategy to lower your student loan payments, the next step is to divert your savings into a high-interest savings account.
That savings account should only be for your future down payment. Don’t touch it for any reason if homeownership is your main goal.
Depending on your circumstances, it might seem like you’re not making much savings progress. Try to remember that building the habit of saving for a goal is as important as the savings itself. Strengthen that muscle now so, when your income eventually increases as your career grows, you’ll be ready to take your savings to the next level.
4. Throw any windfall into savings
Speaking of taking your savings to the next level, that’s exactly what you should do if you receive extra money. I’m talking about tax refunds, bonuses from work, birthday money, and so on.
Although it’d certainly be more fun to spend that money on a gift for yourself or a trip, use it instead to boost your savings.
When you see your savings jump because of that extra money you put in, it can make you feel more confident that you’ll save enough for your future home.
Millennials’ debt isn’t the end of homeownership
If you’re a millennial in debt, then a lot of this might seem overwhelming. But there is a light at the end of the tunnel.
An April report from the Federal Reserve Bank of New York showed that older millennials might have a better chance at homeownership — after they turn 33.
What’s more, Fannie Mae is raising the ceiling on debt-to-income ratios (DTI). This is helpful because hitting the ceiling on DTI makes it harder to get approved for a mortgage. When the ceiling is raised July 29, you’ll have more wiggle room in how much debt you can have.
Even if homeownership feels far away now, following the four steps above will help you lower your monthly payments to increase your rate of savings for a down payment. And that means you don’t have to wait until the day you hit a zero-dollar balance on your student loans to save for a home.
In the meantime, you can move at will and not worry about things like mowing the lawn while you live as a renter. Not owning a home right away isn’t all bad.
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