The Case of the Missing First Time Homebuyers

It is no secret that student loan debt has tripled in the last ten years, to a total nationwide amount exceeding one trillion dollars. 

Moreover, student loan debt is essentially like an incurable illness – – it can never be “fixed” in Bankruptcy Court.  Now, evidence is emerging that this one trillion dollar debt is impeding the recovery from the Great Recession’s housing collapse

An April, 2013 study from the Federal Reserve Bank of New York noted that the “aggregate student loan balance” had reached over nine hundred billion dollars by the end of 2012.  Moreover, the bank noted that the percentage of 25 year olds carrying student loan debt had gone from just 25% in 2003 to 43% in 2012, and that the average debt balance was $20,326 in 2012.

Although most debt can be erased in bankruptcy, the 2005 changes to the Bankruptcy Code excepted from bankruptcy discharge any educational loans, made by or insured by governmental units, unless doing so would impose an undue hardship on the debtor and the debtor’s dependents.  In order to fit within the “undue hardship” test, a student loan debtor must establish that, based upon his current income and expenses, (i) he cannot maintain a “minimal” standard of living for himself and his dependents if he is forced to repay the loan, (ii) these circumstances will persist for a significant portion of the loan repayment period, and that he made a good faith effort to repay the loan anyway.

Now, as reported in a recent article in The Washington Post, experts are wondering whether the growing student loan burden is undermining the nation’s attempt to recover from the housing crash of 2008.  Although the housing market has improved recently, the demand for housing is now waning as the price of homes and mortgage rates have both gone up.  Indeed, the Mortgage Bankers Association reports that, for the past four months, loan applications for home purchases have declined by nearly 20% as compared to the same period a year ago.

This is hardly surprising.  First time buyers are clearly not entering the housing market in large numbers, due in part to the soaring level of student loan debt they are carrying.  This is a worrisome trend for the future.  Unless a way is found to ease the student loan debt burden, it will not simply be twenty-somethings who face difficulty in building secure financial futures.  Rather, everyone who owns a house and counts on being able to sell it – – whether for retirement or to move up the housing ladder – – will be impacted.  Without first-time buyers entering the “conveyor belt” of home ownership, the entire process will stall.