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Exploring ways to manage student loan debt and take out a mortgage

(Photo illustration by Maximilian Franz. Uses image by Feverpitch / Depositphotos.com)

(Photo illustration by Maximilian Franz. Uses image by Feverpitch / Depositphotos.com)

The college class of 2017 likely graduated last month with more student debt than any class before them. As college costs rise, declining homeownership rates have been named a casualty of the rising student debt.

But even when a graduate buys a home, that student debt can be an extra weight hanging over the homeowner’s head, an added cost of $350 a month for the average borrower.

College scholarship site Cappex estimates that college students in the class of 2017 have graduated with an average loan debt of more than $37,000. A USA Today report estimated that the average debt load of the class of 2015 in Maryland was more than $27,500.

And that debt has been a factor in a sagging Maryland real estate market, said the Maryland Realtors.

California-based fintech company SoFi has stepped into both the home lending and student debt fields, offering financing for mortgages and refinancing for student loans.

SoFi’s Student Loan Payoff ReFi program could help consumers fix their student loan issues by combining the two products, and it has been touted as a potential solution to the student debt crisis.

The program allows homeowners to refinance their mortgage and consolidate student loan debt into the mortgage. It effectively pays off the student loan and adds the monthly payments to the mortgage.

SoFi’s program served as a pilot for Fannie Mae as part of a package of changes, announced in April, to help those with student debt buy homes. The package includes expanding the cash-out refinance option. Another change would exclude student debt, credit cards and auto loans paid by someone else from the mortgage debt-to-income calculation.

The SoFi program could work well for certain situations, said J.P. Krahel, a professor of accounting at Loyola University’s Sellinger School of Business. But those situations can be limited because a person has to have a home with enough capital to pay off the student loan.

“It strikes me as a really strange combination,” he said. “Here’s the problem, if you are in good enough shape to have half your home paid off, you probably don’t need help paying off your student loan.”

And while SoFi has marketed the program towards consumers with student loan it is not much different than options a homeowner might use to renovate a basement or build a deck.

“SoFi has done a great job in positioning themselves in that space,” said Kathleen Murphy, president and CEO of the Maryland Bankers Association. “Banks do the same thing but we call it a cashout refinance.”

It could help banks get re-introduced to student lending. But it’s an area they have largely left to the federal government, which handles 90 percent of student lending. When the federal government handles student loans, it does not have to calculate borrowers’ ability to repay, the way banks must do for loans they issue.

Homebuyers in Maryland with student debt do have options through state government. The state Department of Housing and Community Development runs a program called SmartBuy that allows prospective buyers to pay off at least a chunk of their student loans while buying a home.

Under the program, buyers only have to put 5 percent of the purchase price down on a home. They receive the primary mortgage loan from a bank and the state runs a second mortgage component that pays off the student loan.

SmartBuy helps the state get rid of houses it has repossessed and into the hands of homeowners committed to living in the homes, a requirement of the program.

As of Friday, 24 units have been sold or are under contract through the program. The average home sells for $210,000, while the average student debt relieved is $27,000.

But the SmartBuy program is limited by inventory and does not solve the more systematic problem of students graduating with high student debt. But more education and outreach could help graduates learn how to best utilize the financial resources available to them.

“I just think people need to get financially educated as early as possible,” Krahel said. “At the very least before they commit to renting for the rest of their lives.”


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