Student Loan Debt May Be More Dangerous Than Ever for New Grads

Source: iStock

Source: iStock

Paying for a good education can be costly. Some new grads are in so much student loan debt that they’re unable to afford major purchases like a home or car, and many are having trouble keeping up with their bills. Roughly 43% of college graduates with more than $25,000 in student loan debt said they had to put off a home purchase because of debt, according to a Gallup survey.

Credible, an online marketplace for student loan refinancing, recently conducted a study showing the depth of the impact of educational debt on the financial lives of new grads. The Cheat Sheet spoke with Credible’s founder and CEO, Stephen Dash, for more on the survey findings. Here’s a peek into our chat.

The Cheat Sheet: Why did Credible decide to conduct this study?

Stephen Dash: Credible helps borrowers in two ways: by connecting borrowers with lenders who are able to save them money by refinancing their student loans at lower rates, and by providing borrowers with information that helps them understand their options for managing their student loan debt. Based on anonymized data we receive, we draw insights about trends in student loans that give us—and consumers—a better understanding of the issues student loan borrowers face.

CS: What were some findings from this report that surprised you?

SD: We created an interactive chart that illustrates how degrees that are associated with greater earnings potential can make it easier for graduates to take on additional debt like a home mortgage or car payment, even if they also carry greater student loan debt. But if you have a degree that creates a lot of student loan debt without a corresponding increase in earnings potential, your ability to take on additional debt is more restricted.

Source: iStock

Source: iStock

CS: This report takes a look at different debt to income ratios by major. What is generally a healthy debt-to-income ratio and why does it matter?

SD: The National Foundation for Credit Counseling recommends shooting for a DTI of 36% or lower and that lower is always better. If your DTI is too high, you often won’t be able to get a loan, no matter how good your credit score. Mortgage lenders like borrowers with DTIs of 36% or lower because that’s a soft cutoff for Fannie Mae and Freddie Mac. Borrowers with good credit may be able to take out a mortgage with a DTI as high as 45%, but they’re often required to make a larger down payment or take out mortgage insurance.

Remember, DTI is calculated by dividing all of your monthly debt obligations by your monthly income. Our analysis shows that the DTI associated with the student loan payments for an undergraduate nutrition degree, for example, was quite low (7.37%). But adding a mortgage, car payment, and credit card debt pushed the DTI of someone with an undergraduate nutrition degree to levels that could be problematic. A pharmacy degree is associated with much more student loan debt, but also greater earnings potential. While the DTI associated with the student loan payments made by the holder of a pharmacy degree was higher (11.22%), pharmacists were able to take on a mortgage, car payment, and credit card debt while still maintaining a favorable DTI.

CS: What are some things students should take into consideration when choosing a major?

SD: While you should obviously be passionate about your chosen field, you also need to be aware of the income you can expect to earn in that field and how much student loan debt you can justify taking out to pay for that degree.

Follow Sheiresa on Twitter and Facebook.

More from Money & Career Cheat Sheet:

More Articles About:   ,