Student Debt Is Coming Home to Roost

by Sara Parrish, President, CampusDoor for Scotsman Guide | September 1, 2023

Opportunity exists to earn new business and diversify into a new market

Imagine the dilemma facing Emily, a 40-year-old single mother who is eager to buy her first home. A psychologist with $30,000 in federal undergraduate student loans, she lived frugally during the COVID-19 pandemic and saved more than usual after the government sanctioned a loan payment pause. Home prices are still a stretch for her. With her payments resuming, will she be able to take on a mortgage too?

Emily is a fictional example of someone who typifies the challenges faced by today’s consumers, and she is far from alone. As of third-quarter 2023, 43.6 million Americans are shouldering $1.644 trillion in federal student debt, according to the U.S. Department of Education. With private student loans also counted, borrowers owe a total of $1.757 trillion, equating to an average balance of more than $40,000.

“Mortgage lenders have not always felt the need to get into student lending or refinancing, but that is changing as the demand for mortgage products dwindles.”

The age range of those with educational debt is exceptionally broad: 7.1 million borrowers are younger than 25 years old; 15.1 million are 25 to 34; 14.7 million are 35 to 49; 6.5 million are 50 to 61; and 2.7 million are 62 or older. Among them are 3.7 million Parent PLUS borrowers who hold $111.7 billion in outstanding debt.

Depending on someone’s stage of life and financial circumstances, finding new ways to manage this debt might enable them to afford a starter home, trade up, downsize, assist their children with a downpayment, purchase a vacation home or take out a second mortgage for home improvements. But are they likely to approach a mortgage lender for creative ways to handle their debt burdens? In many cases, until recently, the answer was no.

Loyal relationships

The pandemic-induced moratorium on student loan payments, in effect since March 2020, is set to end in September. Mortgage lenders have not always felt the need to get into student lending or refinancing, but that is changing as the demand for mortgage products dwindles. Suddenly, lenders are reconsidering diversification into this additional market, even if they have no experience in it.

Providers of third-party platforms for private student loan origination or refinancing are making this a more practical revenue-generating opportunity. For example, some providers are partnering with investors who want to hold the loans, which opens the door to nondepository institutions for the first time.

The credentials of borrowers who qualify for private student loans, in particular, are attractive to many lenders and investors. These college- educated borrowers typically demonstrate strong credit quality (a 750 FICO score is commonplace) and very good repayment records.

Offering these student loan products can help lenders develop loyal, “sticky” relationships with young borrowers who aren’t yet ready to be homeowners but someday will be. Research indicates that those who continue their education beyond high school will earn at least $1 million more than their peers over their lifetime. These higher earnings will put them in a better position to eventually become homeowners — and they are more likely to imprint with the lenders that made the additional earnings possible.

Read the rest of the article at Scotsman Guide

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