How Much Is Too Much Student Loans – By Laura Alix CloseText About Laura on twitter lauraalix linkedin lauraalix October 06, 2017 at 2:54 pm. EDT 3 min read
Fannie Mae’s recent push to help millennials saddled with student debt to buy homes appears to be paying off. Bankers said the policy change is making it easier to qualify young home buyers.
How Much Is Too Much Student Loans
Fannie announced the new rules in April. Perhaps the most significant change was an overhaul of the formula banks use to calculate a borrower’s debt-to-income ratio, which measures a person’s ability to make monthly payments.
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Under previous guidance, the lender considered the higher of the borrower’s amortized student loan payments or 1% of the student loan. A borrower whose monthly payment was reduced from $500 to $100 on an income-based payment plan could be rejected under these rules because the lender would have to use a more conservative measure than the actual monthly payment.
Under the revised rules, a lender can use a borrower’s monthly student loan payments to calculate the debt-to-income ratio.
Fannie also expanded its cash-out refinance option, which allows some homeowners to pay off their student loans. In addition, the government-sponsored enterprise allowed mortgage lenders to take into account the fact that borrowers’ parents sometimes paid off certain non-mortgage debts.
“We don’t have an accurate count of how many borrowers we have with student loan debt,” said Michael Sheehan, retail lending manager at the $1 billion-asset Chelsea Groton Bank in Connecticut. “But when I sat down with our underwriting team and talked about whether or not the program had an impact, it definitely did.”
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Sheahan told the story of a borrower whose bank was willing to walk away the day Fannie announced the changes. Under the old rules, the borrower’s debt-to-income ratio was a bit too high. And calculated according to the new rules, the ratio has dropped to an acceptable level.
The changes were Fannie Mae’s response to a problem that has vexed mortgage lenders in recent years: Young people aren’t buying homes at the same pace as previous generations, and student debt is a major obstacle. Fannie aimed to give lenders more flexibility in evaluating student debt.
“There’s a big bucket of millennials burdened with student debt, and this easier guidance really makes sense,” said Bob Cabrera, national consumer loan sales manager for Regions Financial in Birmingham, Ala. “If in fact you’re not paying. 1% of your outstanding debt and it’s not part of your monthly liability, why add it [to the debt-to-income ratio]?”
Steve Shoemaker, director of residential mortgage production at Synovus Mortgage, said Fannie’s changes focused on demand for mortgages among millennials saddled with student debt. He said Fannie Mae is “reacting much faster than I thought it would in trying to meet the needs of our consumers, so everyone has that opportunity.”
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Of course, there are still challenges. For many young people in major metropolitan areas, the high cost of housing and the lack of affordable inventory are of particular concern. More borrowers can now qualify for mortgages or have larger mortgages than ever before, but finding a home to buy is a different story.
That’s one of the main concerns for borrowers, including the $2.4 billion Belmont Savings Bank in Massachusetts, said CEO Bob Mahoney. Count him among the skeptics about Fannie Mae’s changes.
Specifically, Mahoney has concerns about Fannie Mae’s debt-to-income ratio. The change may result in more applicants qualifying for mortgage loans, but it will not reduce their overall debt burden.
“When the parents pay off the debt, I buy it. “Okay, check that off,” Mahoney said. “But sometimes we get into trouble by lending too much to good people. There’s another side to the coin.”Consolidating your student loans can save you time and money. Find out how to consolidate and the pros and cons of each route.
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In total, they borrowed $1.5 trillion to get their degrees, and it wasn’t easy to pay it back. One in 10 defaults on student loans, and although the average repayment period varies depending on the amount owed, it can be said to last at least 10 years and can be as long as 30 years.
Members of the Class of 2019 who took out student loans owe an average of $31,172 and their payments are less than $400 a month. This is a big and unexpected graduation gift, so it’s important to know how to minimize the damage.
If the money you are borrowing is federal loans, you may find easier payment options by applying for a Direct Consolidation Loan.
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If some or all of your student loans are from private lenders, you may need to use a refinancing program to achieve similar results.
Consolidation is one way to make paying off your student loans more manageable and possibly less expensive. You combine all of your student loans into one large consolidation loan and use it to pay off all the others. You stay with one payment to one lender each month.
A typical student loan recipient receives money from federal loan programs each semester at school. This often comes from different lenders, so it’s not unusual to end up in debt to 8-10 separate lenders by the time you graduate. If you continue to get loans for graduate school, add 4-6 more lenders to the mix.
Each of these student loans has its own term, interest rate, and payment amount. Keeping track of such a schedule is difficult and is part of the reason many people default. Student loan consolidation is such an attractive solution.
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Federal loans can be consolidated into the Direct Consolidation Loan Program. You consolidate all your federal student loans into one loan with a fixed interest rate. This rate is calculated by taking the average of the interest rates on all federal loans and rounding to the nearest eighth of a percent.
While this method won’t lower the interest you pay on federal loans, it will keep all repayment and forgiveness options open. Some lenders allow you to lower your interest rate by making direct payments or by making on-time payments over a longer period of time.
Student loan refinancing is similar to the Direct Consolidation Loan program in that you consolidate all of your student loans into one loan and make one monthly payment, but there are important differences to consider before making your decision.
Refinancing, sometimes called private student loan consolidation, is primarily for personal loans and can only be done through private banks, credit unions, or online lenders. If you have borrowed from federal and private programs and want to consolidate the entire lot, this can only be done through a private lender.
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The main difference between refinancing and direct loan consolidation is that in refinancing, you negotiate a fixed or variable interest rate that must be lower than what you are paying for each loan. Lenders consider whether you have a cosigner when determining your credit score and interest rate.
However, if federal loans are part of your refinance, you lose the payment options and forgiveness programs they offer, including deferment and forbearance. These last two things can be very important if you are facing financial difficulties while paying off your loans.
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There are many good reasons to consolidate through a direct loan consolidation program, including REPAYE (pay as you earn), PAYE (pay as you earn), IBR, and any income-based plans that can save your life. (income based payment) and ICR (income contingent payment).
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There are two sides to every story, and here’s another side to consider before jumping straight into a loan consolidation program:
If you miss payments because you’re dealing with multiple loan servicers and multiple payment deadlines, consolidating or refinancing is the right choice. Making one payment each month instead of multiple payments makes life easier.
You can go through the Direct Loan Consolidation Program because it allows you to keep the door open for income-based payment options, resulting in lower monthly payments.
However, if your payments are part of any forgiveness program, it’s important to know that the clock starts over when you consolidate s. For example, if you made three years of qualifying payments for Public Service Loan Forgiveness, then if you consolidate your loans, you lose three years of qualifying payments and the clock starts over.
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A big issue for most borrowers is whether they can afford to pay
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