Many student loan borrowers had a 3.5-year period without payments, but they still cannot afford to enter the housing market.

Many student loan borrowers had a 3.5-year period without payments, but they still cannot afford to enter the housing market.

The Challenges Faced by First-Time Home Buyers with Student Loans


The dream of homeownership has become increasingly elusive for many first-time buyers in recent years. The combination of rising home prices, soaring mortgage rates, and the burden of student loans has created significant challenges for those looking to enter the housing market. Even the temporary pause in student loan payments during the pandemic has not been enough to alleviate these obstacles. In fact, the principal and interest mortgage payments on the typical new home loan have more than doubled since the student loan payment pause began in March 2020, according to Zillow.

The housing affordability squeeze is so severe that the savings accrued from over three years without having to pay their federal student loans are still insufficient to cover a down payment in most markets. Zillow suggests that first-time homebuyers, on average, need about 5% of the amount of their loan for a down payment. However, the average amount saved by student loan borrowers during the pandemic falls short of this requirement. This mismatch underscores the financial strain faced by individuals juggling student debt and homeownership aspirations.

Furthermore, debt-to-income (DTI) ratios pose an additional barrier for first-time homebuyers with student loans. Despite the payment pause, there are no clear indications that borrowers’ DTI ratios improved during this period. According to Stacey MacPhetres, Senior Director of Education Finance at EdAssist by Bright Horizons, a recent study published in the National Bureau of Economic Research reveals that many borrowers actually increased their personal debt on credit cards, mortgages, and auto loans during the pause. This, coupled with the rising cost of inflation, creates a challenging financial landscape for aspiring homeowners.

A high DTI, in conjunction with the rising cost of inflation, can make it even more difficult for potential buyers to afford all the expenses associated with buying a home, including down payments, mortgages, insurance, closing costs, utilities, maintenance, and homeowners’ fees. The recommended DTI limit for borrowers with conventional mortgages is 36%, while it is 43% for FHA loans, according to Zillow. In markets with high home values, high mortgage rates, and existing debts, reaching these DTI limits can be a daunting task, making homeownership seem like an uphill battle.

The Potential Solution: Income-Driven Repayment Plans

Despite these challenges, there could be hope for first-time homebuyers with a new repayment plan known as an income-driven repayment (IDR) plan. IDR plans set a borrower’s monthly student loan payment at an affordable amount based on income and family size. The Federal Student Aid office offers four different IDR options, which limit monthly dues to only 10% to 20% of a borrower’s income. These rates are established to help borrowers pay off their loans over a 20 to 25-year period.

According to Travis Hornsby, founder of Student Loan Planner, borrowers need to ensure that student loans do not become an obstacle when qualifying for a home. One of the most common issues borrowers face is not being enrolled in an IDR plan. Being on an IDR plan can significantly increase the chances of qualifying for a mortgage without being burdened by student loans.

In late June, the Department of Education introduced a new IDR option called the Saving on Valuable Education Plan, which reduces payments to just 5% of discretionary income. This change is expected to lower the average payment size by $245 per month, according to Zillow. This reduction in monthly student loan payments could help borrowers improve their DTI ratio and make homeownership more feasible.

Kurt Carlton, co-founder and president of New Western, a private marketplace for residential investment properties, believes that the upcoming changes in IDR plans could alleviate some of the hurdles faced by borrowers. If borrowers have saved a significant portion of their paused loan payments, it could help overcome the down payment barrier or serve as a safety net for unexpected homeownership expenses.

However, both housing and student loan experts agree that evaluating the entire financial situation is crucial when considering buying a home. Although monthly student loan payments have been reduced by an average of 69%, borrowers must carefully monitor their financial situation and make informed decisions when planning significant purchases.

While the challenges for first-time homebuyers with student loans remain significant, the introduction of income-driven repayment plans offers a glimmer of hope. By managing student loan payments alongside the expenses of homeownership more effectively, aspiring homeowners can navigate the financial landscape and achieve their dream of owning a home. It is essential for borrowers to explore all available options, strategize their finances, and seek professional advice to effectively balance student loan obligations and homeownership aspirations.