Sunday, January 31, 2016

Debt to Income Ratios

As we all know lenders love to see low debt to income ratios. It helps them to determine the likelihood that the debt will be paid off.

In a recent Bloomberg article by Sarah Grant posted on Yahoo Finance certain college majors have lower income to debt ratios for undergrad degrees (please note that the group making the calculations did not factor in certain cost of living realities)(1).

Sounds great assuming that one is able to get into those programs, but that aside below is a chart from the article showing the various majors and DTIs.
From (1) The College Majors That Won’t Leave You Drowning in Debt. Bloomberg.

Obviously medicine tops the list as the lowest with what looks like less than 15%, whereas those going into Psychology have the worst at nearly 40% with Education a close second (1).

Here is the rub will all this talk about DTI—Bankers giving out housing loans use the same criteria to determine if an individual(s) can repay a housing loan. Typically they are looking for rates less than 36% (2).

So here you are just graduated with the Bank of ED loans, and let us say you marry that sweet heart you met in College (who also has Bank of ED loans). Now combined your DTI is somewhere around 30% let us say with both Bank of ED loans. So now you plan to leave the rat-hole of an apartment to get a used condo. This would mean you have combined DTI difference of about 6% to get something. Okay that is not enough to get anything really except maybe a cardboard box in an alley (unless your incomes are like that of Donald Trump and then that 6% is something significant).

And people wonder why the Millennials are not buying houses as fast as they should be… maybe the problem is the DTI is too high as soon as they walk out of college? Of course in order to lower this reality a few things will need to occur- 1. Those with College Education Loans need to automatically earn the highest wages possible (as if they had been working at a place for the last 30 years), 2. College Debt needs to be forgiven in masse, and/or 3. Prices of Houses need to drop significantly more.

Okay I think #1 is nearly impossible without some major shift in either the minimum wage to be based on educational attainment or social understanding of what college education is worth.

#2 is possible legislatively for Bank of ED loans under certain leadership assuming said leadership is willing to take the budget hit for writing off that much owed debt. Of course it could cause greater potential for credit default by the U.S. Treasury lowering the overall credit rating of T Notes to possible near junk without some serious raising of tax revenues or serious cut backs on spending.

 #3 could happen as the Baby Boomer age and are moved into some form of assisted living creating a major oversupply of available housing. This assumes that many are not taking out Reverse Mortgages which require them to live in place until they die. It also means that Millennials will have to settle for some seriously used homes from their parents which may require them to borrow even more so to just fix up the place.

At any rate, college debt clearly has skewed the economy of things in the U.S. probably for a long time.

(1) Grant, Sarah (Jan. 27, 2016). The College Majors That Won’t Leave You Drowning in Debt. Bloomberg. Retrieved From

(2) Bankrate (2016). Debt-to-income ratio calculator. Retrieved from

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