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Smarter But Homeless

Jonathan Clements  |  December 5, 2015

SOARING STUDENT DEBT is putting the kibosh on another major financial goal: buying a home. According to a study by researchers at the Federal Reserve Bank of Cleveland, 40% of those age 18 to 30 have student debt, up from 27% in 2005. For these borrowers, the debt burden is staggering, with student loan payments estimated to devour more than 20% of their income in 2015.

With so much of their income devoted to servicing student loans, these young adults are less likely to buy a house, because they can’t afford to take on a mortgage. Lenders typically don’t want mortgage borrowers to have total monthly debt payments that are above 36% of pretax monthly income. The upshot: The Cleveland Fed researchers found that just 7% of those age 18 to 30 own a home, down from 11% a decade ago.

What’s to be done? Parents may not be able to help with college costs. But they can help by offering sound advice. If your children are unlikely to have high-paying careers, you should encourage them to attend colleges where they are less likely to end up with crippling amounts of debt. For instance, you might suggest they attend a nearby college, so they can live at home and avoid the cost of room and board, which accounts for half of the total tab incurred by in-state students at state universities. Alternatively, you might encourage your teenagers to attend a local community college for two years, and then transfer to a more prestigious college, from which they can then graduate.

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