How Increasing Student Debt Will Affect Young Home Buyers



The effects of the COVID-19 pandemic are widespread, and they’re not just affecting seasoned full-time workers. College students, in particular, are facing a lot of uncertainty — not just in the short-term but potentially for years — or even decades — to come.

Students are having an even harder time paying for college in light of the pandemic and taking on more debt as a result. Even before the pandemic, nearly 2.2 million student loan borrowers had a student loan balance of at least $100,000, according to personal finance site Make Lemonade. Here’s what this means for their ability to buy a home in the future.

Student job loss

According to research from a Real Estate Witch study, 56% of college students lost a full- or part-time job in 2020 as a result of the pandemic. 

Many students rely on working lots of summer hours — either at a paid internship, full-time job, or taking on more hours at their part-time job — in order to foot the bill for tuition, books, housing and utilities throughout the year. With many of these jobs in service industries such as restaurants, bars, tourism, or retail, many have lost out on this opportunity to stockpile cash for the school year.

Paying for tuition

About 36% of students said a parent lost income as a result of COVID-19, and it directly impacted their ability to pay for college and living expenses. With many parents typically helping out with tuition and the decrease in summer jobs for students, 48% say they are concerned about paying tuition this year.

Although many colleges and universities have opted for online courses to prevent the spread of the virus, this doesn’t usually mean they’re reducing tuition rates: Just 3% of the 100 colleges surveyed planned to decrease their tuition this academic year.

Taking on more debt

As a result, 48% of students are taking out more in loans this year than they did in 2019 — with 33% taking out at least $10,000 more than they did last year. 

Based on a previous student debt survey from Clever, college students are also 21% more likely to carry credit card debt and 33% more likely to have personal loans to help cover expenses this fall than they were in 2019.

At some point, students will need to pay these loans off, and other big-ticket financial purchases will take a backseat — most notably, buying a home. Already, millennials are buying homes later in life than previous generations due in part to their student debt. This problem will only become worse for current college students as a result of taking on even more loans.

Difficulty finding a job after graduation

The pandemic doesn’t only affect college students’ ability to find internships or pay for tuition this year. Their post-college career may also be stunted by high unemployment and a down economy following graduation.

While no one can predict just how long these effects will stick around, for the foreseeable future, there will be more competition for a limited number of positions in the job market — and it may even be from more qualified candidates who were laid off during the pandemic. 

Even after the immediate effects of COVID-19 have subsided, it may take years for companies to feel confident enough in their future outlook to start re-hiring or expanding.

In addition, more than 60% of “entry-level” jobs require at least three years of experience, according to a survey from TalentWorks. Students’ lack of ability to gain relevant experience through internships or jobs in 2020 could hurt them when they enter the job market.

How current students can plan ahead

More now than ever, current students should take advantage of any scholarships or grants they can find. The easiest way to get rid of debt in the future is to reduce the amount of loans taken out in the first place.

When looking for room and board, students should opt for no-frills housing — now isn’t the time to splurge for apartment complexes that boast of a swimming pool or five-star gym. Those funds can come in handy and are better served toward tuition and books to decrease loans needed and future debt.

How to buy a home with student debt

New graduates can afford a home, but it starts with planning early, settling into a reasonable budget and looking into ways to save. Buyers who are still in student loan debt can seek out a home buyer rebate when they purchase a home or save additional money by working with a discount broker that offers a lower realtor fee.

There are also several types of down payment assistance that may be available to those with student loans, depending on their circumstances. Federal Housing Authority (FHA) loans require as little as 3.5% in a down payment and are available to first-time home buyers. U.S. Department of Agriculture (USDA) loans have even lower down payment requirements — as low as 0% — but are usually only applicable to certain areas of the country. If the buyer or their immediate family has military service, they may also qualify for a Veteran’s Association (VA) loan.

In the long-term, buyers with a lot of student loan debt can work to move all their debt away from credit cards and into monthly payments instead. By focusing on creating manageable monthly payments, borrowers can ensure they make payments on time and keep their credit scores intact.

If you’re a real estate agent working with a buyer who has student debt, you can steer them in that direction or connect them with lenders to help them navigate debt consolidation and pay off any balance if they have a delinquent payment.

Bottom Line

Millennials and young adults straight out of college were already pushing off buying a home due to heavy debt loads and the 2008 recession, but the COVID-19 pandemic will likely exacerbate the problem as more students take on more student debt. 
Expect more Generation Zers (those born after 1997) to move back in with parents to save up for a down payment, live with roommates to cut down on bills, and maybe even skip the starter home phase altogether. Also, they’ll be looking for smaller homes in the suburbs or even further, where home prices are more affordable.

Thomas O'Shaughnessy About Thomas O'Shaughnessy