Lindsay Woodruff and her husband thought they were doing everything right. She obtained a degree from Xavier University, which left her with $16,000 in student loan debt, below the current national average for college debt. And though she was accruing $22,000 in debt from her graduate degree, the Woodruffs were financially stable. After the birth of their first daughter, they owned a home they could afford, they took Dave Ramsey’s financial course and they paid off their credit card debt and the debt on their cars.
When they found out another child was on the way, they decided they needed more space. They sold their home, moved in with Woodruff’s parents and began a new house hunt. But when they went to apply for a mortgage, they were rejected by lenders.
“Even though I was working part-time, the mortgage company told us that my debt to income ratio was too high,” said Woodruff. “They couldn’t include my income in our mortgage pre-approval. That was the moment we went, ‘Man this is a problem. Why are we trying to buy a house? Our priority should be paying off the student loan.’ ”
Brown and Caldwell hypothesized that a tightening in underwriting standards is likely a major cause of people like Woodruff delaying home and car purchases. Examining credit score data provided by Equifax, a consumer credit ratings agency, Brown and Caldwell concluded that the average credit score for 25-year-olds who did not have student loan debt was 15 points above that for student borrowers, and the average score for 30-year-olds who did not have student loan debt was 24 points above that for student borrowers.
According to a Pew Research Center study, the debt-to-income ratio of younger adult households more than doubled from 1983 to 2007. This is forcing millennials into a tight spot. A higher education will likely provide them with higher earnings down the road, but it will hurt their ability to obtain credit in the near future.
An uncertain future
While the impact of student debt on young peoples’ ability to purchase big-ticket items is hard on individuals, it may also be hurting the country’s economic recovery. Brown and Caldwell found that college educated young people are no longer filling the same economic role that they once did. “While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace,” they said.
Currently, student loans are at the crosshairs of a political battle. If the government does not act by July 1, interest rates on federal subsidized loans will double from 3.4 percent to 6.8 percent, increasing the pain for young people who are already in a tough financial position.
Republicans and Democrats are currently debating whether the student loan interest rate should float with the market interest rate or should be at a fixed rate. Sen. Elizabeth Warren, D-Mass., has proposed that the government should let students borrow at the same rate Wall Street banks can borrow from the Federal Reserve, around .75 percent.
But while lowering interest rates may alleviate the burden felt by young borrowers, the reality for college-educated millennials is that their total student loan indebtedness will likely remain high relative to their incomes. And for many young people, the result has been a fundamental shift in the way they think about traditional markers of adulthood. To Lindsay Woodruff, the importance of hitting particular ownership milestones simply no longer takes precedence. “The American consumer is obsessed with the idea that you have to own all these things,” she said. “I don’t think they are as important as paying off my debt.”