Ohio Congresswoman Marcy Kaptur Proposes Turning Student Loans Into Mortgages
Posted By Donna Fuscaldo on January 27, 2016 at 9:30 am
Our country’s record loan debt, which currently stands at $1.3 trillion, is causing negative reverberations throughout the country. And it’s partly to blame for decreasing home ownership among millennials. After all – with more than 40 million people with at least one student loan (and with the average student loan with a balance of around $30,000), purchasing a home isn’t even in the equation for many people.
However, one congresswoman, Marcy Kaptur (D-OH), thinks she has the answer: turning student debt into home mortgages for credit-worthy federal student debt holders.
“By arranging prudent financing alternatives that recalculate terms, debt-to-income ratios, mortgage interest rates and other factors, FHA could transition shorter-term student debt into longer term home ownership,” said Kaptur when announcing her plan. “The economic and financial gains are potentially even greater in the long run as housing values rise.”
Student loan debt preventing home purchases
How to deal with outsized student loan debt and the impact it is having on the housing market, particularly when it comes to first-time home buyers, has been a challenge for a number of years. According to American Student Assistance’s Life Delayed report, 55% of people surveyed said their student debt has impacted their ability or decision to purchase a home, with survey respondents pointing to debt-to-income ratios and the inability to save for the down payment as the biggest challenges to home ownership.
“Student loan debt is a real factor and a substantial component of the decision,” says Bob Walters, chief economist at mortgage lender Quicken Loans. “In some cases, it is stopping them from buying a home even if they could afford to purchase it because the debt-to-income ratio is too high.” In the current lending environment, most mortgage lenders won’t approve a mortgage application if the borrower’s debt-to-income ratio, or the amount of debt compared to their income, is higher than 43% to 45%. Student loans, unfortunately, are pushing many borrowers above that level, preventing them from buying a home.
“Student loan debt restricts a potential homeowner’s ability to save for a down payment, reduces the portion of their income available for mortgage payments, and undermines their ability to accrue home equity over their lifetime,” says Kaptur in an email interview with GoodCall.com. “Mortgage debt is typically more affordable due to lower interest rates. It also opens up important benefits of home ownership: financial stability, home equity, civic engagement.”
Converting student loan debt into mortgage debt would be particularly helpful in places like Ohio’s 9th Congressional district, says Kaptur. There, single family homes lay vacant because there aren’t enough qualified and motivated buyers. “This pilot program would create an opportunity to reduce student debt burdens, build home equity, and stabilize neighborhoods near regional economic centers like Cleveland and Toledo,” she says.
Student loan debt crisis front and center in election year
With the country entering an election cycle, the student loan debt crisis is gaining more attention from politicians, policy groups, and consumer advocates who are all offering up potential ways to tackle the problem. Kaptur’s idea is just one of a number of proposals making the rounds. According to Kaptur, in 2014 the percentage of homes sold to first-time buyers declined 33 percent, reaching the lowest level in three decades. At the end of 2014, close to 17 million homes were vacant across the country, with 57,000 in Kaptur’s district alone. In Ohio the combined value of the vacant homes is $1.9 million, she says.
The way Kaptur sees it, recalculating student loan debt into a home mortgage can not only lay a path for student loan debt holders to move forward but it could also boost their wealth over the long run as housing values rise. Not to mention it would help to restore neighborhoods, boost property values and even improve the Federal Housing Authorities’ ledger.
But in order for it to work, Kaptur acknowledges it would require the cooperation of three federal departments: the Department of Education, Department of Housing and Urban Development and the U.S. Treasury Department, which could be an insurmountable task. Not to mention that Republicans would have to be on board, which could be a hard sale since many bristle at a heavy handed government.
The idea is in its infancy with Kaptur saying she’s working on getting a pilot project off the ground to demonstrate that the concept can work and give lawmakers an opportunity to test the waters with several different approaches. Kaptur acknowledges the most important thing at this point is to bring the three agencies to the table with local land banks and stakeholders who are already on board with the idea. “A pilot program would be a great way to build interest and experiment with our options,” says Kaptur.
Not everyone wants more government help
While Kaptur is bringing a brand new solution to the student loan debt to the table, not everyone thinks it is the correct remedy. Beth Walker, a financial planner at The Wealth Consulting Group, is one person who thinks this program won’t work. “It’s the classic old saying that the hammer can fix everything,” says Walker. “I can’t imagine a worse scenario.” According to Walker, not only does the math not work with this proposal but she says it’s also another example of a politician thinking more government can fix the problem.
“If they really want to solve the student loan debt [problem] they should eliminate the [federal] student loan program that gives colleges permission to raise prices,” she says. “All colleges have to do is match students with the federal financial aid system and they get the full benefit. It doesn’t matter if the student graduates or gets a job – they still get paid.”
Still, not everyone thinks it’s a bad idea. Sure, it would be a challenge to get government agencies to work together. And it’s not clear how the program will work since it would likely only be for properties held or serviced by the federal government or local county land banks. But any efforts to push the issue of student debt to the forefront and help struggling students is worth examining. “It’s important to look at all the creative ways to address the student loan debt issue,” says Kevin Fudge, manager of Government Relations and Community Affairs at American Student Assistance, noting that this is the first sandwich generation that not only has to take care of their children and elderly parents but also contend with student loan debt. “The reach of student loan debt goes way beyond college.”