A WHITE PAPER by the Asian Real Estate Association of American and Better Homes and Gardens Real Estate.

Transcription

1 Student Debt and Housing Presented by: DEBT A WHITE PAPER by the Asian Real Estate Association of American and Better Homes and Gardens Real Estate. 1

2 The cost of college tuition and the rate of borrowing for students are at all-time highs. According to a study by the New York Federal Reserve, [S]tudent loan balances and the prevalence of student borrowing have reached new heights, with the nominal aggregate student debt reflected in the New York Fed s Consumer Credit Panel (CCP) growing from roughly $360 billion in 2004 to $1.4 trillion in 2016, and the prevalence of student borrowing by age 25 rising from 25% in 2004 to nearly 45% by The National Association of REALTORS latest study on Student Debt and Housing, Student Loan Debt and Housing Report 2017: When Debt Holds You Back, released on September 18th, 2017, student debt represents 10% of all outstanding debt in the U.S., and 35% of all non-housing debt. 2 Student debt is now the second largest source of debt in America, passing both credit card debt ($659B USD) and automobile loans ($875B USD). 3 The average student loan balance in the US is currently $41,200, with 29% of all outstanding debt being valued at $70,000 or more. With the cost of attending college skyrocketing, young adults are taking out loans to help pay for an education that is supposed to help them earn more money over their lifetime, pay more taxes, and be more productive members of society. The US Department of Education College Scorecard asserts that on average, college graduates will earn $1 million more over their lifetime than high school graduates. 4 This statement implies a conclusion that if given time and an ability to build wealth through avenues such as homeownership, those who graduate college with outstanding student debt would have the necessary financial resources to repay their loans. 2

3 Student debt is now the largest source of non-mortgage debt in America. $1.4 Trillion $1.1 Trillion $785 Billion 3

4 In a recent study published by the National Association of REALTORS, data shows that student debt has adversely affected the ability of homeownership by over 70%. Further, 40% of students with student debt are still dependent on and living with their parents upon graduating from college. Combine these statistics with a very modest average salary earned by most young millennials, and this creates a situation where it reduces or in some cases eliminates their ability to purchase a home before the age of % 4 Ability of Homeownership Adversely Affected by Student Debt

5 Between 2001 and 2009, the state average tuition and fees per school year increased nearly 81%, though the previously mentioned report found no correlating decrease in educational attainment, meaning the American student was instead simply taking on more debt to account for rising costs. Following the housing recession, homeownership of 30 year olds fell from 31% in 2004, to just 21% in Increases in tuition and the accompanying rise in student debt can be directly attributed to 35% of this decline. 6 40% Students with debt still live with parents 31% 21% Homeownership of 30 year olds 5

6 51% Pacific Islanders receiving Student Loans 38% According to the U.S. Census Bureau, Asian Americans and Pacific Islanders (AAPI), tend to go to 4-year colleges and post-graduate schools at significantly higher rates than other ethnicities. Further, AAPI tend to go to more expensive schools, and go for degrees that require more years of education such as engineering, medicine, science, and law, than other ethnicities. 7 The Department of Education finds that 51% of Pacific Islander and 38% of Asian American college graduates received a student loan. 8 In a survey by the National Financial Capability Survey, 25% of AAPIs over the age of 25 said they felt saddled with student debt and that it was a major obstacle to buying a home. Furthermore, in a 2016 study by the US Department of Education and the National Center for Education Statistics, AAPI had the highest percentage increase (20%) of year olds that completed a bachelors or higher degree. AAPI have the highest rates of college graduation at both the bachelor s (AAPI: 49%; US Avg: 28%) and post-grad levels (AAPI: 21.2%; US Avg: 10%). 9 Asian Americans receiving Student Loans AAPI College Graduation Rate AAPI Post-Grad Rate 49% 21% 28% 10% 6 U.S. Avg College Graduation Rate U.S. Avg Post-Grad Rate

7 This combination of a greater percentage of the population going to college and post-grad, to more expensive colleges, for longer periods of time than other demographics 10, means that AAPI are especially at risk of becoming overburdened by student debt. The fields of study that AAPI tend to choose also typically require substantial apprenticeship periods that further delay their ability to make enough money to comfortably pay back their student loans. 81% Tuition and Fees Increase From As the nation s cost of education continues to rise and students have to borrow more money, it becomes imperative to create avenues for younger generations to purchase a home. Earlier this year, Fannie Mae created a new program that allows students to pay down student debt with a mortgage, exclude non-mortgage debt that s paid by another individual (such as a person s parents), make it more likely for borrowers with student debt to qualify for a mortgage loan by allowing lenders to accept student debt payments included on credit reports. 11 Programs such as this will become critical as student debt continues to rise. Other solutions include allowing student borrowers to refinance their debt, just as homeowners and businesses can ; cap monthly payments or otherwise directly tie to a borrower s income 13 ; and, as other countries such as Australia have done, eliminate interest on outstanding debt % All Non-housing Debt $41,200 Average Student Loan Balance $70,000 or more on 29% of Outstanding Loans 7

8 The Asian Real Estate Association of America (AREAA) and Better Homes and Gardens Real Estate have partnered to raise awareness about the critical relationship between student debt and housing. Utilizing AREAA s 37 chapters across the US and Canada, the two organizations are creating local education outreach programs to educate real estate professionals, lenders and mortgage officers, and consumers about how student debt can negatively affect a person s ability to purchase a home, the various programs available to potential homebuyers who hold student debt to help them qualify for a loan, and updates on the political climate surrounding the issue. In May of 2017, AREAA also advocated for an elimination of the so-called 1% Rule in lending to those with outstanding student debt that s in deferred or forbearance status. The rule, imposed by FHA, Fannie Mae and Freddie Mac, required lenders to assume a 1% repayment on outstanding student loans in calculating an applicant s debt to income ratio 15. However loans in deferred or forbearance status do not require the debt holder to make any payments toward the loan, thus, this rule created an unnecessary and unfair burden that would prevent many otherwise qualified applicants from securing a loan. 1% AREAA For Example: If an applicant had an outstanding loan of $30,000, a lender would be required by this guideline to assume a repayment of 1% per month counted against the applicant s Debt-to-Income ratio. This would mean an extra $300 would be assumed to be part of an applicant s monthly debt payment, despite the fact the applicant is not actually making the payment. After receiving significant negative feedback and resistance to the new rule, guidelines have since been eased, allowing lenders to make the decision on how much of a repayment, if any, to count against an applicant. 16 Explanation of Terms: Deferred and Forbearance: Under certain circumstances, you can receive a deferment or forbearance that allows you to temporarily stop making your federal student loan payments or to temporarily reduce the amount of your federal student loan payments. Stopping or reducing your payments may help you avoid default. Under deferred status, you are not responsible for paying the interest that accrues over this period; under forbearance status, you are responsible for accrued interest once payment restart. 8 Debt-to-Income Ratio: A debt-to-income ratio (DTI) is one way lenders (including mortgage lenders) measure an individual s ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.

9 Two of the greatest ways for a person to become financially stable and build wealth are education and homeownership. The country must simultaneously look for ways to reduce the rising costs of a college education, help those with high interest student loans refinance, and encourage younger Americans to become homeowners. Education must be seen as an investment in our nation s future, and we must ensure that future generations do not have to choose between getting an education and purchasing a home as both are vital to our economic stability and growth. America must make a commitment to its future, and it begins with solving the student debt crisis. 9

10 The Survey Respondent Demographics Student Loan Debt Amount Where debt is from: Four-year college: 79% Two-year college: 19% Graduate/post-graduate: 29% Technical school: 7% Length since enrollment: Currently enrolled: 4% Less than a year: 3% 1-3 years: 66% 4-6 years: 22% More than 6 years: 6% Choice of college primarily due to: Academic fit: 45% Financial fit: 24% Emotional fit: 15% None of the reasons listed/other: 16% Type of higher education institution: Public: 68% Private: 46% For-profit: 5% Median Student Loan Debt: $41,200 Student Loan Debt Amount 16% 17% 13% 13% 13% 12% 9% 5% 2% 10 $1 - $5,000 $5,001 - $10,000 $10,001 - $20,000 $20,001 - $30,000 $30,001 - $40,000 $40,001 - $50,000 From: Student Loan Debt and Housing Report National Association of Realtors Research Department and SALT $50,001 - $70,000 $70,001 - $100,000 More than $100,000

11 Among NON-homeowners: Student Loan Debt Delaying From Buying a Home Among non-homeowners respondents, 83 percent believe their student loan debt has delayed them from buying a home. Among older millennials, 86 percent believe their student loan debt is delaying them from buying a home Among all respondents, debt delaying potential home buyers is highest among those with more than $70,000 in student loan debt about nine in ten believe it is delaying their ability to purchase a home. Among NON-homeowners: Delay From Buying a Home 83% 3% 2% 7% 5% Yes, impacted No, student loan debt had no impact on ability to purchase No, ability to purchase a home is result of attending college & improved long term economic stability Don t know Don t want to own 11

12 The Asian Real Estate Association of America (AREAA), established in 2003, is a national business trade organization focused on expanding housing opportunities for Asian American communities and creating business opportunities for real estate business leaders who serve this growing market. With over 16,000 members in 37 chapters across North America, AREAA is the largest real estate trade association dedicated to promoting homeownership in the Asian American and Pacific Islander communities. About Better Homes and Gardens Real Estate LLC Better Homes and Gardens Real Estate t is a dynamic real estate brand that offers a full range of services to brokers, sales associates and home buyers and sellers. Using innovative technology, sophisticated business systems and the broad appeal of a lifestyle brand, Better Homes and Gardens Real Estate LLC embodies the future of the real estate industry while remaining grounded in the tradition of home. Better Homes and Gardens Real Estate LLC is a subsidiary of Realogy Holdings Corp. (NYSE: RLGY), a global leader in real estate franchising and provider of real estate brokerage, relocation and settlement services. The growing Better Homes and Gardens Real Estate network includes approximately 11,000 affiliated sales associates and approximately 300 offices serving home buyers and sellers across the United States, Canada and the Bahamas. Better Homes & Gardens is a registered trademark of Meredith Corporation licensed to Better Homes and Gardens Real Estate LLC and used with permission. An Equal Opportunity Company. Equal Housing Opportunity. Each Better Homes and Gardens Real Estate Franchise is independently owned and operated. For more information, please visit: Student Debt and Housing 2017 Asian Real Estate Association of America, All Rights Reserved. Scott Berman, Editor 1 Bleemer, Z., Brown, M., Lee, D., Strair, K., & Van der Klaauw, W. (2017). Echoes of Rising Tuition in Students Borrowing, Educational Attainment, and Homeownership in Post-Recession America (Staff Report, no. 820) (USA, Federal Reserve, New York). New York, NY: Federal Reserve. JEL classification: D14, E24, R21 2 Student Loan Debt and Housing Report 2017: When Debt Holds You Back. National Association of REALTORS College Scorecard. (n.d.). Retrieved September 15, 2017, from 5 Student Loan Debt and Housing Report National Association of REALTORS. 6 Bleemer, Z., Brown, M., Lee, D., Strair, K., & Van der Klaauw, W. (2017). Echoes of Rising Tuition in Students Borrowing, Educational Attainment, and Homeownership in Post-Recession America (Staff Report, no. 820) (USA, Federal Reserve, New York). New York, NY: Federal Reserve. JEL classification: D14, E24, R Musu-Gillette, L., Robinson, J., McFarland, J., KewalRamani, A., Zhang, A., & Wilkerson-Flincher, S. (2016). Status and Trends in the Education of Racial and Ethnic Groups 2016 (USA, Department of Education). Washington, D.C.: US Department of Education. 9 Ibid Rozens, A. (2017, April 25). Fannie Mae Introduces Innovative Solutions for Borrowers with Student Loan Debt. Retrieved September 15, 2017, from Fannie Mae Introduces Innovative Solutions for Borrowers with Student Loan Debt 12 O Malley, M. (2015, April 23). Federal solutions to our student loan problem. Retrieved September 15, 2017, from 13 Ibid 14 How Australia Gets Student Loans Right. (n.d.). Retrieved September 15, 2017, from Harney, Kenneth. May 2nd, New rules on student loans may make it easier for many to qualify for mortgages. Retrieved September 20, e ddb6e813e_story.html?utm_term=.ad7a6c9e0257