In the past, one of the best ways to secure a place in the middle class was to get a college education, which would assure a better income and the ability to buy a home. Over the long term, your home would be the cornerstone of your personal wealth.
I still think this is true, but as the events of recent years have proven, it is not a given. So it is more important than ever before to learn what debt levels you can comfortably handle, and have the discipline not to exceed them.
The housing recession proved that home prices don’t always go up—though Dallas loan officer Richard Woodward contends homeownership is still a better long-term investment than renting because of tax benefits and historic appreciation. “Purchase a home with monthly payments similar to your rent expense and don’t overextend yourself,” he advises. “You will come out ahead in the end.”
Meanwhile, college is no longer a guaranteed golden ticket—the Consumer Financial Protection Bureau has noted that the growth of the country’s collective student-loan debt is far outpacing wage growth for graduates. Moreover, the cost of getting a degree is growing at an alarming rate: both the number of borrowers and the amount owed have both risen 70% since 2004, according to the Federal Reserve. The nonprofit One Wisconsin Institute, a liberal nonprofit research group, found that the average payoff time for a student loan was 21 years.
That’s a long time to wait to buy a home. So I suggest that you start saving what you can now, while still paying down your student debt faithfully to preserve your credit worthiness. Some ideas:
Look into consolidating your loans, says Don Frommeyer, president of the National Association of Mortgage Brokers, because lenders will be looking at your debt-to-income ratios. Depending on whether the loans are federal or private, they may get you a lower monthly payment (though at the cost of a longer repayment period).
Consider Federal Housing Administration loans, which require a down payment of only 3.5%. But understand that, as Mr. Frommeyer says “you must be able to pay the loan back, based on your current standing.”
Pay cash whenever possible to avoid taking on any new debt, especially expensive credit-card debt.
Do what you must to keep your housing costs low while you save for a down payment, even if that means taking on roommates or living with your parents.
Eliminate every discretionary expense that you can, from gym memberships to restaurant meals.
Investigate first-time home buyer subsidies for down payments and closing costs.