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Student debt is just one piece of the puzzle for first-time homebuyers

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By Marilyn Kennedy Melia
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No doubt you’ve heard: student debt is clouding the future of college graduates, derailing hopes they will one day own a home.

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That forecast doesn’t hold up, according to a report from the Brookings Institution.

Drawing on Federal Reserve data from 2003 to 2012, the report finds that graduates who had borrowed for college do have a slower start to home buying than those who went to college debt-free. However, by the time both groups of graduates enter their mid-thirties, they have similar rates of home ownership.

“The typical undergraduate borrower with a bachelor’s degree has a debt of $30,000 and owes $350 a month,” reports Dynarski. The burden of student debt is offset by the significantly higher earnings college grads can expect,” she notes.

It’s the total amount of student debt measured against earnings that determines whether grads will later be in a position to buy, agrees Mark Kantrowitz, publisher at the college scholarship site Cappex.com.

If total student debt exceeds annual income, he says, income-driven repayment plans that stretch payback beyond the usual 10 years are often necessary. If the borrower’s income rises, payments revert back to the 10-year term.

Since new rules make it more difficult for students to get credit cards, many recent grads don’t have any other debt than a student loan. If they make timely payments, they build a good credit score, putting them in a position to buy later, says Adam Levin, co-founder of Credit.com.

A mortgage applicant who is still paying off student loans can still be approved, notes Neil Caron of Freedom Mortgage.

As long as the monthly payment on the new mortgage and monthly student loan bill and any other regular monthly debt don’t exceed a certain threshold of total income, often about 36 percent, the loan can be approved.

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