If you've just finished college and are heading to a new job, avoid the extremes. In other words, don't panic about your student loans, but don't ignore them either before locking yourself into huge expenses like rent and car payments. With so much …
Category: Student Loans
As the cost of college climbs along with the average student debt burden, students and their families can be left in the lurch. Many take out private loans, often at high interest rates, to cover college costs.
A change to loan conditions, made after it's taken out? A mortgage company can't legally do that to borrowers, but it seems the government can.
More than half (55%) of parents in a recent study said their children will use student loans to pay for college, up from 50% in 2012.
If not handled properly, your student loan can hurt your chances of getting a mortgage. Here’s why.
Your student loan servicer reports to the credit bureaus every 30 days, much like a credit card issuer or auto lender. But you may have a payment deal with your student loan servicer that isn’t reflected accurately on your credit report.
Let’s say you have $80,000 of student loans with one lump monthly payment: $500 per month. The credit report, instead, might list multiple loans from several financers with varying payments that, when added up, show you owe more than that each month. That can be a big problem when it comes time to calculate your debt-to-income ratio — an important barometer of creditworthiness in the homebuying process.
Mortgage Tip: Whether youre considering a conventional mortgage or an FHA loan, lenders will include any deferred student loan payments when calculating your debt-to income ratio.
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How This Can Trip Up Your Mortgage
When you apply for a mortgage, lenders take into consideration your credit score, your monthly pre-tax income and the aforementioned debt-to-income ratio to determine how much house you can afford and your overall ability to repay.
Lenders calculate this ratio by adding the proposed new housing payment (including principal, interest, property taxes and insurance) to any other outstanding debts, such as a car payment, a credit card payment or student loan payment. Generally, banks want a debt load no bigger than 45% of your monthly income, but 36% or lower is considered more financially sound.
Misreported student loans can skew your debt-to-income ratio over these thresholds and cause your mortgage to get denied.
What to Do if a Problem Arises
It can be a good idea to walk your lender through each payment obligation listed on your credit report,.
You may be able to get a better idea of what debts they might see by pulling your credit before you go shopping for a loan. You can get your credit reports for free each year at AnnualCreditReport.com and get a free credit report summary from Credit.com to see areas in which you might be able to improve. A better score will also help your qualify for lower interest rates on a mortgage.
Keep in mind that lenders are required to use what the credit report shows in their decision-making process, unless a statement can be provided showing the correct payment amounts.
If your student loan payments are different than what is being reported — for example, if ABC Student Loan Servicing is reporting a $600 payment per month, but your actual statement involves a $500 monthly payment — you can have your mortgage company perform a credit supplement. A credit supplement is used in the lending industry to verify credit accounts and payments. It can solve any issues arising from the way your student loan servicer reports to the credit bureaus for mortgage qualifying purposes.
You also may be able to provide a statement in the form of a letter from your student loan servicer or servicers, detailing the specific payment amount due or what the proposed monthly payment on deferred loans will be. (Deferred student loans can no longer be ignored in the mortgage qualifying process.)
Without such documentation, the lender will have to take a more conservative approach in underwriting, using 2% of the balance as a monthly payment to qualify. Using our $80,000 student loan balance example above, that approach equates to a $1,600 monthly payment, driving down your buying power substantially.
More on Mortgages amp; Homebuying:
- How to Find amp; Choose a Mortgage Lender
- How to Get a Loan Fully Approved
- How to Search for Your Next Home
Sen. Marco Rubio (R-FL) speaks to voters at the Heritage Action Presidential Candidate Forum September 18, 2015 in Greenville, South Carolina. Eleven republican candidates each had twenty five minutes to talk to voters Friday at the Bons Secours Wellness arena in the upstate of South Carolina. (Photo : Sean Rayford/Getty Images)
The Obama administration is calling on Congress to make it easier for some student loan borrowers to erase their debt through bankruptcy, as part of a package of proposals aimed at helping Americans who are struggling with loan payments.
In a report released Thursday by the US Department of Education, administration officials outlined a range of recommendations for improving the nations student loan system, most of which require congressional action.
Perhaps the most significant proposal — and likely to be among the more contentious — is for Congress to ease the process for private student loan borrowers seeking to have their loans wiped out through bankruptcy. The administration is proposing that Congress roll back a 2005 law, enacted at the behest of private lenders, which set a high bar for when bankruptcy filers can discharge their private student loan debt.
Consumer advocates and some congressional Democrats have long sought such a change, but this is the first time the Obama administration has backed a revision to the rules governing how student loans are handled in bankruptcy proceedings.
All other types of consumer debt are dischargeable in bankruptcy and we think private student loans are a glaring exception, Under Secretary of Education Ted Mitchell said in an interview, explaining the administrations new position.
We feel strongly that while there are protections built into the [federal] direct loan program that are important for borrowers, there aren#39;t parallel protections for borrowers in the private student loan market, Mitchell said. We think it#39;s important to do what we can to create those protections, and we think starting with a bankruptcy provision is the way to go.
The administrations proposal would not ease bankruptcy discharges across the board on private student loans. Instead it would extend the enhanced borrower protections only to private student loans that dont offer flexible repayment plans like those granted to federal loan borrowers.
Meanwhile, the standard for discharging student loans made by the Education Department should not be lowered, the administration said in the report.
There are strong grounds for maintaining different standards for federal student loans, the report says. Federal loans are not underwritten, have generous terms and protections, and the payments can be limited based on income.
Private student loans, by contrast, tend to lack some of those protections and can leave borrowers in financial distress with few options, officials wrote.
Beyond changes to bankruptcy, the administration also proposed adding other consumer protections to private student loans, such as banning private lenders from automatically declaring a loan in default when a co-signer dies.
Penalties for For-Profit Executives, Tax Code Changes
The Education Department report, which President Obama ordered earlier this year as part of what he called the Student Aid Bill of Rights, also recommends an expansion of the departments powers to hold college executives personally liable for fraud committed at the institutions they run.
Administration officials said they wanted new statutory requirements that hold colleges and their executives — not taxpayers — responsible for fraudulent acts.
That proposal is aimed at addressing the need to hold executives accountable, directly and personally, for malfeasance, Mitchell said. We are able to fine schools, we#39;re able to sanction institutions, but we don#39;t have tools to sanction individuals.
A group of Senate Democrats earlier this week introduced similar legislation.
The report also recommends that Congress allow students who were defrauded by their college and successfully prove their case to the Education Department under its new debt relief process should have their Pell Grant eligibility restored.
In addition, Congress should eliminate taxes on the amount of student loan debt forgiven under the federal income-based repayment programs, the report says.
Enrollment in such plans, which typically forgive unpaid balances after a borrower makes payments for 20 or 25 years, has surged in recent years as the administration has expanded and heavily promoted them. But when the government begins canceling student loan debt under those programs, which could start as early as 2017, borrowers will have to consider the amount of loan forgiveness as taxable income.
Changes to Federal Loan Servicing?
The report also outlines some general principles for how the Education Department should improve its system for hiring companies to collect federal student loans. The departments oversight of federal student loan servicers has been a frequent target of criticism from consumer, labor and student groups as well as some congressional Democrats and other federal agencies.
The recommendations arrive amid a flurry of activity in recent weeks surrounding federal loan servicing. The Government Accountability Office said in a study released last week that the Education Departments loan servicers had done too little to help borrowers sign up for income-based repayment plans. And earlier this week, the Consumer Financial Protection Bureau said it is exploring new regulations to crack down on what it sees as abuses in the student loan servicing industry.
Theres a rapidly growing consensus to correct the serious deficiencies in the student loan servicing industry, said Rohit Chopra, the former student loan ombudsman at the Consumer Financial Protection Bureau who now serves as a senior fellow at the Center for American Progress. The industry is at a critical inflection point: either quickly clean up its practices or face a very uncertain road ahead.
For its part, the Education Department has said it wants to conduct an overhaul of the existing contracts it has with its loan servicers, which was originally slated for later this year.
Mitchell said Thursday that the department is still working out the specifics of redoing the contracts, which he said the department expects to put out for bid early next year.
Student debt can be an intimidating item in a new graduates monthly budget. These are four ways to get ahead and taken control before graduation.
College of DuPage 2014 commencement ceremony. Photo courtesy of COD Newsroom/Flickr.
Staying on top of your payments is the No. 1 rule when your grace period ends and student loan repayment starts. Federal student loan servicers play a crucial role in keeping your loans current, but you might not know what these companies do or how to work with them effectively. Thats why its key to educate yourself about the student loan system so you know how to get what you need from your servicer.
Here are five reasons why understanding how your loan servicer works, and communicating regularly with the company, are your secret weapons for keeping your student loans under control.
1. Servicers collect, and keep track of, your payments.
Nearly 41 million student student loan borrowers were in repayment as of June 2015. The federal government contracts with 11 student loan servicing companies to collect and manage all those borrowers monthly payments. So when you pay your federal loan bill each month, you send it not to the government directly, but to one of these companies.
Your servicer will contact you after your first federal loan is disbursed, and its best to register for an account on its website right away. You can start keeping track of how much youve taken out and how much interest adds up while youre in school. Once you graduate, sign up for automatic monthly payments through your servicer so youre less likely to fall behind.
The four most common servicers are FedLoan Servicing, also known as PHEAA; Great Lakes Educational Loan Services, Inc.; Navient and Nelnet. There are several smaller servicers, too, including CornerStone, Granite State Management and Resources and MOHELA. (A full list is available at Federal Student Aid.)
2. Servicers help you pick the repayment plan thats right for you.
When you complete a federal loan exit counseling session your senior year of college, youll have the opportunity to pick a repayment plan, which determines the amount youre required to pay each month toward your loans. Many students arent aware of the federal governments many repayment options, so they stick with the standard repayment plan. The standard plan breaks up your total balance into 120 fixed payments over 10 years, and if you have a lot of debt it can be difficult to afford as a new grad.
Student loan servicers can help you figure out if youre eligible for one of the governments income-driven repayment plans, which tie your loan payments to your income so you never pay more than you can afford. Youll be required to fill out an application and re-certify your income every year to stay eligible. Your servicer will work with you — for free — to make sure all your documents are in order.
3. When you give servicers instructions, they customize your payments.
Once you start earning enough money to pay extra toward your loans, you might want to pay off certain loans first — like the ones with the highest interest rates, which will help you save money in the long run. Some servicers will automatically apply an extra payment across all your loans in a certain billing group, but you can call, email or write them a letter instructing them to apply an extra payment to a certain loan instead.
Federal regulations require your servicer to apply extra payments first to late fees, then to accrued interest and, finally, to the principal balance, or the original amount of the loan you took out. Contributing more than your scheduled payment will reduce both your overall balance and the interest you pay over time, so kick in a little more than you need to when you can.
4. Servicers process your requests for deferment or forbearance.
In a single 10-year repayment term, there may be periods when you cant afford your loan payment; you could lose your job, get sick or decide to join the Peace Corps. No matter what keeps you from being able to pay your bill, call your loan servicer to let it know as soon as you can. Before you start falling behind, youll have the option to apply for deferment or forbearance, temporary postponements of your payments during periods of financial difficulty.
Deferment will save you more money, since subsidized loans dont accrue interest while theyre deferred. All your federal loans will continue to accrue interest during forbearance, but its a good option for borrowers who dont qualify for deferment. Your servicer will help you determine which one youre eligible for and how to get it.
5. Servicers are your first point of contact if youre interested in loan forgiveness.
Grads who work full time for the government or for nonprofits should ask their servicers about the Public Service Loan Forgiveness program (PSLF). Make 120 on-time payments toward federal Direct Loans as a public service employee, and your remaining balance will be forgiven if youre still working in the public interest at the time of forgiveness.
To make sure youre on track to get the benefit, your servicer can help you determine whether your loans are eligible, whether youre on a qualifying repayment plan and whether youve properly filled out the Employment Certification Form. FedLoan Servicing manages the PSLF program for the government, so your loans will be transferred to that servicer if you dont already work with it.
Your servicers role is to help you. But if youre experiencing an issue with the company that youre having trouble resolving, submit a complaint to the Federal Student Aid Ombudsman Group of the US Department of Education. Before you email or call the office, first read up on what the Ombudsman Group can do, then make sure you have the background information you need by filling out the Federal Student Aid Ombudsman Information Checklist.
Keep in mind that there are always resources available to you if you need help repaying your federal loans. Instead of ignoring the problem, work with your servicer and the US Department of Education, if necessary, to get back in good standing and commit to getting out of debt.
Learn more about your individual student loan servicer:
FedLoan Servicing, also known as PHEAA
Great Lakes Educational Loan Services, Inc.
Brianna McGurran is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @briannamcscribe.
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As tuition at higher education institutions across the United States creeps ever upward, so does the burden of student debt. For hundreds of thousands of students, the burden proves too much: The default rate on federal loans is 11.8 percent for borrowers who were required to start making payments during the 12 months before October 2012, down from 13.7 percent in fiscal year 2011. Nearly 611,000 students defaulted on their loans in fiscal year 2012, according to federal data.
Locally, default rates range from a low of 0.3 percent at the Lake Erie College of Osteopathic Medicine to 9.8 percent at Mercyhurst University (a number that includes its North East campus, which offers associates degrees; the default rate at the main Erie campus is 5.4 percent and 15.3 percent at North East, according to the university). Default rates at for-profit institutions are much higher.
Not paying back loans can have consequences larger than students imagine: Defaulting can negatively affect a students credit rating, which can affect their ability to rent an apartment, buy a car or even secure employment. The government can garnish wages and seize tax refunds.
There are lots of bad and negative things that happen when you default on student loans. Thats why its important to get people on track early, said Allesandra Lanza, director of corporate communications for American Student Assistance, a nonprofit organization that works with colleges and other nonprofits to help students understand how to finance and repay their education.
Mercyhurst University recently contracted with American Student Assistance to provide counseling and other services to current students and alumni. Some students dont understand the process of loan repayment, or the many repayment options available, said Joe Howard, vice president for enrollment.
Mercyhurst is unique in that our mission compels us to recruit students from a wide variety of socioeconomic backgrounds. One-third are PELL eligible, Howard said, referring to the federal grant program. Those students often come from families where they arent gaining financial literacy. If theyre first-generation college students, their parents havent experienced the loan system before.
Students receiving federal loans must take part in pre-loan counseling and complete a second session before they leave school. Penn State Behrend also offers a series of webinars (as many as 10) to incoming students and their parents, explaining the loan process and what they should expect after leaving campus.
At Allegheny College in Meadville, staff members in the financial aid office personally reach out to each student who is in loan default, said Sue Stuebner, executive vice president and chief operating officer. Before graduation, a Countdown to Commencement program helps students learn how to budget for what they owe.
We certainly want to make sure finances are not something preventing a student from being able to graduate or persist in school, Stuebner said.
Sometimes, the issue is too big to think about.
As Brittany Thomas and her friends fretted about loans over lunch at Behrends Brunos Cafe, freshman Mackenzie Sloan was just happy to be in college, applications and financial aid forms complete. The cost of college was a major factor in deciding where to enroll, and loans were a necessity, she said.
Now the 18-year-old from Cranberry Township is focused on software engineering, a career she chose because of good job prospects.
As for repaying loans?
Ill cross that road when I get there.
ERICA ERWIN can be reached at 870-1846 or by e-mail. Follow her on Twitter at twitter.com/ETNerwin. Read the Happier Ed education blog at blogs.goerie.com/education and post comments.