Part 1: The Problem
I’ve been thinking about the student loan debt problem a lot recently. It may be the biggest albatross around the necks of the younger generations today. I would love to solve the whole problem. While I haven’t done that, I realized I know of some strategies to help prevent or minimize it in some circumstances.
This post is the first of five on the topic. I hope it is useful to somebody in some way. I know it is not directly related to real estate or investing, but it breaks my heart to see the levels of debt some kids acquire only to find out they can’t work in their chosen field with the degree they obtained.
A CNBC article claims, “buying a home can be almost impossible with massive student loan debt.” Any amount of student loan debt can make qualifying for a mortgage more difficult because lenders have strict guidelines for a debt-to-income ratio. That is, your total monthly debt payments (for cars, credit cards, mortgages, student loans….) can’t exceed a certain percentage of your gross income. That percentage can vary a little by lender, but it is always less than 43%.
So, if 43% or more of your gross income goes to debt service, no new mortgage.
Home equity is still the most common way families generate and hold onto wealth. Not only is student loan debt an albatross around the cash flow of many young people (and even some approaching retirement), it can keep them from getting started on the road to financial wellbeing. It can keep them from attaining the goals that were probably the reason they acquired the student loans in the first place.
Two, Maybe Three, Options
I wish I had a better solution for those already struggling to pay off their student loans, but I only see two overlapping options for them:
- Increase your income
- Accelerate your debt repayment
Plenty of sites out there offer advice on how to accomplish these options. Almost anything I say would be redundant.
But I do know one way to buy a house with a high debt-to-income ratio: buy it with owner financing. We offer that service occasionally. But owner-financing from an investor comes at a price. We charge at least four percent above our cost of money.
You may be able to find individuals who are willing to finance a house for less, if they are looking for retirement income or passive income. If so, always have your lawyer go over the paperwork before you commit and never, never take on a rent-to-own purchase. Rent-to-own agreements are not even legal in some states because of abuses by unscrupulous sellers. They are typically a way for landlords to get tenants to pay for repairs on properties. Very seldom do rent-to-own transactions result in a change of ownership.
In the next few posts, I will describe my solution to getting through college without drowning in debt:
- Decide if college is the right choice for you. It may or may not be.
- If it is, figure out a way to pay for it without hocking your future. I did it. I know of at least one other way to do it.
Next time I’ll talk about that heretical first decision.