Opinion: Weight of student debt a drag on the future

Michael Brown

A new report from LendEDU found that many young Americans are already staring down an overwhelming debt-to-income ratio (DTI) due to student loan debt, which will surely impact their ability to move forward financially after leaving campus.

Private student loan lender Funding U provided LendEDU with data from 10,000 student loan applicants that featured analysis on things like projected starting salary for each applicant depending on their major and institution, projected student loan debt balance and monthly student loan debt payments upon graduation for each applicant, and the projected debt-to-income ratio (DTI) from student loan debt for each student loan applicant.

DTI is what a consumer pays each month for debt obligations relative to how much he or she brings home each month. Lenders for any financial product, from mortgages to credit cards, place a heavy emphasis on DTI as it is a good indicator for predicting if a borrower will be able to meet monthly payments. 

Typically, an all-in DTI of 36% is considered “healthy,” while lenders typically won’t extend financing to any consumer with a DTI above 43%. 

According to LendEDU’s report, 28% of student loan borrowers already have a DTI over 15%, while 16% of borrowers are already facing down a DTI above 20%. 

And, these DTI figures are only accounting for student loan debt. 

It is reasonable to ascertain that many of these student debt-ridden young Americans will soon be opening credit card accounts, taking out auto and personal loans, or applying for mortgages. 

What will happen to those already-bloated DTI figures then? Where will the borrowing prospects for these young Americans go? 

In short, as more monthly debt obligations are piled on top of crushing student loan debt, DTI figures for so many post-graduate consumers will inflate to a point where no lender will want to provide a mortgage or any other form of financing to these debtors.

It is reasonable to ascertain that many of these student debt-ridden young Americans will soon be opening credit card accounts, taking out auto and personal loans, or applying for mortgages, Brown writes.

 And, even if a lender does decide to extend financing, odds are that the terms will come with an inordinately high interest rate so that the lender can protect itself from a risky proposition that could slide into debt-induced default in just a few month’s time. 

This is the impact that crushing student loan debt, brought on by ever-increasing college tuition prices, is having on the young adults of this country. It has become ingrained in their minds that a bachelor’s degree is the prerequisite to success, even if it means taking on so much student debt that their DTIs are dangerous before even considering mortgages or credit cards. 

Solutions must come from both sides of the line. For consumers, each must evaluate if a college education is necessary to get to where they want to go. Can they gain the same skills from trade school, community college, or just by jumping feet first into the working world? 

Moreover, if they do decide to attend a higher education institution, they must think about how that four-year journey will be financed. Should they attend a more affordable, in-state school rather than the dream school across the country? Did they exhaust all scholarship and grant options? Is it worth attending their target school that isn’t offering any scholarship money versus their number three school that is providing a 50% scholarship? 

On the part of lawmakers, the Higher Education Act should be reauthorized, instead of collecting dust on Capitol Hill. Colleges and universities that show a history of high student loan debt figures should be held accountable under the law and should be penalized by having to help repay student loan debt held by graduates.

Michael Brown is a research analyst with LendEDU.