There’s finally proof to what we’ve all long suspected -- that student loan debt is delaying first-time home ownership. In fact, a recent study from the NATIONAL ASSOCIATION OF REALTORS® and the nonprofit American Student Assistance, reveals that this debt can delay home ownership for 7 years (or more).
Perhaps even more concerning is that more than 50% of respondents are paying off over $40,000 in balances, with some owing more than they earn in a year.
So, how can first-time homebuyers break into the market against such tough circumstances? There’s really only one answer: prioritizing student loan repayment above everything else. Not only will repaying balances save money on interest and allow buyers to save more, but paying off debt also lowers debt-to-income ratio (probably, the No. 1 metric lenders use to determine how much you’ll qualify for).
Below are a handful of ways to earn more so you can owe less:
Earn Money on the Side
In the current “gig economy,” there’s no end to the ways people can earn extra money. The options are varied and (seemingly) endless: from driving for a ride-sharing service, to shopping for personal groceries, to freelance writing or taking surveys online, to opening up your own online store.
And even if it’s a small amount each month, an extra $100 or $200 a month can make a big difference when it comes to student loan repayment.
Using this extra-payment calculator we can see the math. If someone owes $35,000 in student loans at 5% interest, adding $200 each month to the existing $383 standard payment shaves 3.8 years off the life of the loan while saving $3,781 in interest.
Maximize Earnings at a Full-Time Job
Focusing on ways to earn more in your 9-to-5 job can profoundly impact your finances. Consider researching comparable pay for your role at other companies, list your accomplishments, and don’t be afraid to have a sit down with your manager to ask for more money. Increasing your monthly take-home amount ups the amount you can save or use toward debt repayment, so it’s important to try and maximize take-home earnings when possible.
More math: Say someone makes $40,000 annually and receives a 5% raise, or $2,000 annually. Broken out each month, this is $166 (before taxes). Using the same numbers above, adding $166 to a monthly payment saves 3.4 years on the life of the loan.
Put Any Windfall Cash Toward Student Loan Debt
Receive a bonus at work? Large cash gift from a relative? Tax refund? This money could be put to great use paying off student loan debt. And while it may be hard not to spend it on something nice for yourself, make sure you stay within bounds and put the rest to your outstanding balances.
For example, let’s say you work hard and receive a $2,000 annual bonus at work. You resist the temptation to spend this money, and instead make a lump-sum payment toward your student loans. Even if you don’t pay anything else toward the loan on a monthly basis, this one-time payment shaves 8 months off the debt repayment timeline on a $35,000 student loan at 5% interest. Imagine if you did this every time you received unexpected extra cash.
Consider Refinancing/Consolidation If You Qualify
Refinancing and debt consolidation may intimidate those who aren’t educated on what these terms mean, but those with money savvy know these can be strong tools to add to your debt pay off tool belt.
Consolidation is combining multiple loans into one at a new interest rate. Consolidation may nab borrowers a lower monthly payment, or lock in a fixed rate if they’ve been in a variable rate loan, but may net a longer repayment term. Consolidation is available for both private and federal student loans.
If the government consolidates your federal loans, they’ll give you a new interest rate that is a weighted average of all the interest rates of all the loans you’re trying to consolidate. During a private loan consolidation, a lender will look at your credit score and give you a brand new interest rate.
Refinancing is using one loan (at a lower interest rate) to pay off multiple student loans, but it is only offered by private lenders. By applying for a new loan to pay off the others, you’ll get a lower monthly payment, lower interest rate, and have only one payment to worry about. But, with private refinancing, you forgo federal benefits like repayment plans based on income and loan forgiveness. Weigh the pros and cons of each option before choosing the one that's right for you.
Both of these are available to borrowers if they have good credit. Plus, they can offer significant financial benefits. For example, by refinancing a $35,000 student loan from 7.6% o 4.45% interest, borrowers can free up an additional $55 in their budget to save for a home down payment.
Using the steps above, student loan borrowers can make home ownership a reality, provided they’re willing to sacrifice and play it money smart for a few years.