Will Higher Student Loan Rates Hurt the Housing Market?

By Steven Shaw on 7/8/2013


Will Higher Student Loan Rates Hurt the Housing Market?

Numerous borrowers nationwide carry student loan balances and know all too well how they can significantly restrict financial capabilities soon after graduation. Now, as that problem becomes even more pronounced in the coming years, some are wondering whether it might have a negative impact on the housing market as well.

Federal student loan interest rates recently doubled as a result of inaction from Congress, and now borrowers taking out new financing as of July 1 will have to pay higher student loan rates of 6.8 percent on these balances instead of 3.4 percent. These added costs will likely tack about $2,600 on average onto each borrower’s student loan debt, and those who take out the maximum amount of credit on these accounts will likely pay considerably more ($4,000) if they pay those balances back in 10 years.

Currently, there are about 7 million borrowers currently paying back these types of student loans, and that number might continue to rise in the future.

Having these additional burdens may make it far more difficult for the average young adult to afford a mortgage, which in turn could create a significant drag on the housing market in general, the report said. If they cannot reasonably expect to buy a home that will necessarily lead to a drop in demand across the entire housing market, which would then create a drag on prices. Already, student loan debts can be massive, and the National Association of Realtors recently reported that first-time buyers accounted for just 28 percent of all purchases in May, down from 34 percent a year earlier.

“It takes out the entire foundation of the housing market,” real estate consultant Jack McCabe told the Sarasota Herald-Tribune. “We’re talking about younger folks who are generally just getting out of college. They were planning on their debt load being at a certain amount, and with studentloan rates doubling, it will make buying a home less affordable. Any time interest rates go up it will have a negative impact on the market, both directly though mortgage rates, and indirectly, through things like student loans.”

The average college student doesn’t leave school with just education debt, but also balances on credit cards and auto loans, all of which can add up to tens of thousands of dollars and significantly reduce financial flexibility.

Image: iStockphoto

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