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Up to Their Eyes in Student Debt Before Even Graduating, Young Americans Will Struggle Moving Forward

By Mike Brown
October 18, 2019
in Credit, Industry Opinions
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Is Consumer Credit Bankruptcy the Next “Hot Thing” in Credit?

Is Consumer Credit Bankruptcy the Next “Hot Thing” in Credit?

A new report published by LendEDU found that 28% of college students will have a projected debt-to-income ratio (DTI) over 15%, while 16% of them will have a projected DTI over 20%, and these figures are just accounting for student loan debt.

These DTI figures cast a shadow of doubt on the future of many young Americans in regards to if they will be able to move forward financially after college and qualify for favorable mortgage, credit card, or auto loan terms.

Student loan lender Funding U provided LendEDU with a proprietary dataset featuring close to 10,000 private student loan applicants. The dataset featured a DTI projection for each applicant that was based on projections made by Funding U for post-graduation salary, total student loan debt at graduation, and monthly student loan debt payments for each applicant. The projections took into account the college each applicant was attending, in addition to their respective majors.

When evaluating prospective borrowers, financial lenders place a heavy emphasis on DTI. All DTI is what you will be paying for all monthly debt payments relative to how much income you take home each month. Typically, the uppermost DTI for the vast majority of lenders is 43%.

Further, when solely account for student loan debt, student loan lenders consider a 15% as “acceptable,” while a DTI of 20% is considered “dangerous.”

Taking these lender strategies into account, how will a considerable proportion of young Americans ever be able to qualify for favorable mortgage terms to purchase a home or be approved for an auto loan to buy a car?

Nearly one in every three college students already are dealing with a DTI over 15%, while 16% of them are staring down a DTI over 20%.

Just from student loan debt.

When they leave the confines of college campus for corporate hubs and cities, they will surely be accessing financing via credit cards or personal loans. If they need to commute to work, they will surely be looking to take out an auto loan. And, what about insurance costs?

All of these things that come with being a young adult will drive up their student loan debt-inflated DTIs. And, when it comes time to take out a mortgage and start a family, a lender will add those projected payments to their DTIs, and they will either be rejected for financing or receive unfavorable terms.

Eventually, when these younger Americans are in their late twenties and early thirties and should be buying houses but aren’t, there will be widespread repercussions for not just the real estate market, but the economy as a whole.

So, how can we stem the tide? Considering lawmakers and consumers, answers can be implemented on both sides.

On the side where consumers and future college students stand, each must honestly consider if a bachelor’s degree is a necessary step to get where they want to go. Can the same skills be cultivated at trade school, community college, or just by heading straight into the working world?

If they do decide to attend college, what is their financing plan? Is it better to attend a cheaper, in-state school as opposed to a name-brand school with a high tuition rate that looks good on paper? Were scholarship and grant options exhausted? If a certain school, that maybe was their third or fourth option, is offering a considerable scholarship, should they head there rather than their dream school that offered zero help in affording the education.

For lawmakers, thumbs must stop being twiddled and the Higher Education Act must be reauthorized. Colleges and universities that show a history of high student loan debt figures should be held accountable under the law and should be penalized by having to help repay student loan debt held by graduates.

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Tags: CreditDebtLendingStudent Loan

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