1/19/2018 | Tom Fire | Buying your first home is a rite of passage, something that often signals that you are finally an adult — with the mortgage to prove it.
Yet for many millennials (loosely defined as young adults between the ages of 18 and 35), home buying is a far-off dream. According to a study by the Federal Reserve Bank of New York, rising student loan debt has pushed homeownership off for many young adults.
In fact, of the overall decline in home ownership between 2007 and 2015, as much as 35 percent can be attributed to millennials simply being unable to afford to buy homes due to student loan debt.
According to the report, if tuition had remained at 2001 levels, rather than increasing exponentially as it did, an additional 360,000 young Americans would have been able to purchase homes during this time period.
In fact, the average age for first-time homeownership risen significantly over the years. The average first-time homebuyer is now 32 years old. In comparison, in 1981, first-time homebuyers ranged in age from 21 to 34.
While there are many factors that play into this changing figure, including the rising cost of real estate in many metro areas, one issue that cannot be ignored is the impact of student loan debt on the ability to purchase homes.
Why Young Adults Are Putting Off Buying Homes
For many millennials, the main reason that they believe that they cannot afford to buy a house is simple: they carry too much student loan debt.
In recent years, the cost of a college education has skyrocketed. And rather than skip higher education, many young adults simply borrowed more money to obtain a degree. This has left many in the position of having a significant amount of debt that may prevent them from making other major purchases — such as a home.
Currently, the national student loan debt stands at $1.4 trillion overall. The average student in the Class of 2016 had $37,172 in student loan debt. With entry level jobs and crushing debt, it is difficult to qualify for — let alone afford — to purchase a home. This has caused many millennials to put off these types of major purchases until they can better handle their finances.
Indeed, while homeownership levels for young adults both with and without student loans has declined, rates of homeownership have declined more sharply for those with student loan debt. A National Association of Realtor’s survey echoed these findings, with millennials surveyed stating that not only did about 50 percent feel uncomfortable taking on a mortgage, many also believed that they would not qualify for a loan with their student loan debt.
What Millennials Can Do to Pay Down Debt
Because student loan debt is a major factor that prevents millennials from buying homes, paying off this debt can be the ticket to being able to purchase a home or move forward with their lives in other ways. Of course, when a person has a significant amount of debt, making progress on these loans may seem like an insurmountable task. However, there are certain ways that millennials can pay down their loans more quickly — even if they don’t have a lot of extra cash at their disposal.
Pay More Than the Minimum
First, consider paying more than the minimum payment each month. By adding as little as $50 to your payment each month, you can chip away at the principal, and shave hundreds or even thousands of dollars off of the total amount owed. The more that you can put towards your loans each month, the more quickly that you will pay them off — and the more money that you will save.
Make Payments Every 2 Weeks
Second, instead of making your payments every month, make your payments every two weeks. Because there are 52 weeks in the year, you will actually be making 26 payments, which is the equivalent of 13 monthly payments — an extra payment each year. This can help you reduce the total amount owed.
Third, if you have private student loans, take a look at your options for refinancing loans. Refinancing is available through private lenders, for both private and federal student loans. It can help you reduce your interest rates, obtain a fixed interest rate and/or reduce the loan term. Each of these can help you save a significant amount of money on your loans, and it should help you pay down your debt sooner.
Plan, Plan, Plan
Fourth, create a strategy. If you have multiple loans, chances are good that they have different interest rates. Examine your loan documents, and list them in order of interest rate, from highest to lowest. Then pay them off, devoting the most money to the loan with the highest interest rate. Once that loan is paid off, you can then put the full amount that you were paying towards it to the loan with the next highest interest rate.
Cut Unnecessary Spending
Fifth, whenever possible, cut your spending to put money towards your student loans. This may mean taking a roommate, getting rid of cable, or ditching your car in favor of public transportation. Each dollar that you save can go directly to your student loans — which can get you one step closer to your goal of being able to buy a house.
You’ve Got This!
While student loan debt can be onerous, it does not have to delay all of your dreams. By working hard to pay down your debt, you can make big purchases, like your first home. If you focus on your goals, then getting free from student loans is entirely possible — and so is home ownership.
Tom Fire blogs over at FIREdUpMillennial.com where he talks about his goal of achieving FIRE – Financial Independence/Retire Early. Tom loves exploring and talking about ways to make the best money decisions so money doesn’t ever have to be an obstacle. Follow him on Twitter @FIREdUpMillenn.