How Student Loans Affect Buying a Home

In an August 2012 report, the Huffington Post stated that college tuition has risen 1,120% since 1978. Since the recession in 2008 banks and financial institutions have been more stringent with approving mortgage loans. In addition to the recent payout of the $25 billion settlement charged by the federal government regarding foreclosures, banks and financial institutions are uneasy about approving risky mortgage loans.

For first-time homeowners or younger borrowers this makes it difficult to get approved for a mortgage loan or for the loan amount desired in addition to the large amount of student loan debt owed.  Many first-time homeowners or younger borrowers have a limited credit history or bad credit along with a modest employment history and low income which makes it even more difficult to get approved. According to the Federal Reserve in the past 3 years only 9% of those ages 29 - 34 were approved for a first-time mortgage, compared to almost 17% approved 10 years ago.

One factor considered in mortgage approval is your debt-to-income ratio (the percentage of your income required to pay your total debt including credit cards, student loans and other debt) which should be between 28% - 36%. Some lenders may use higher ranges up to 45%.  This ratio is used to determine how much you can afford to pay each month towards a mortgage payment. Another factor is your credit score.  If you have a low credit score you may get denied, have to pay a higher interest rate and additional fees or get approved for a small loan.  If you have bad credit (low score) and a high debt-to-income ratio this makes approval even harder.

Student loan debt has reached $1 trillion. Luckily I didn’t have this problem because I received scholarships when I went to college along with assistance from my grandparents. I only had to repay one  small student loan for $5,000 and was able to pay it off within 3 years.

College students who graduated prior to the 2008 recession and those who foreclosed on their homes or became unemployed due to the recession may also be impacted due to their high student loan debt which can take 20 - 40 years to pay off depending on your salary, loan amount and financial situation.

Due to the tough economy it is harder to find jobs that will pay enough to even begin tackling student loan debt and pay for necessary living expenses. Those who earn a modest income will find it even more taxing to purchase a home. This data proves that those wanting to buy a home are worse off than previous generations including their parents.  Here are 13 ways to help you get approved for a mortgage loan if you still owe student loan debt.

1. Use Cash. Pay for items with cash. Stop incurring more debt and pay cash for all items.
2. Consolidation. Explore consolidation options to see if you can combine your student loans into an affordable payment and lower interest rate. However, not all consolidation loans will provide you with a lower payment or lower interest rate.
3. Credit. Fix any errors on your credit report and pay off any late payments to help increase your credit score.  Make all debt payments on time for at least two years prior to applying for a mortgage loan.
4. Down payment. Save as much as you can towards a down payment. You will look more favorable to lenders if you have 20% of the sales price saved for the down payment.  If you can’t afford that, try to save at least 10% for the down payment.
5. Job. Consider getting a second job or working over-time and use the money earned to pay down your student loan debt.
6. Debt. Pay off all revolving debt first such as credit cards or lines of credit, then focus on paying down your student loan debt.
7. Student Loans. Send more than the minimum monthly payment. Pay as much as you can during the first 2-3 years of loan when the greatest amount of interest is accrued.  Make sure you don’t miss any payments.  If you previously deferred on a loan, ask about programs to rehabilitate the loan to put it back in good standing. Once the loan is rehabilitated ask if the negative payment history can be removed from your credit reports to help boost your credit score.
8. Balance. Aim to pay off 30-50% of your student loans to reduce your debt-to-income ratio.
9. Comparison Shop. Start with your local bank or credit union when shopping around for a mortgage loan. Also compare lenders online such as Lending Tree or Bankrate to find the best deal for you.
10. Payoff plan. Start with the smallest student loan first and pay that off, then continuing working your way up to pay off your other loans up to the largest loan.
11. Payment. Use mortgage calculators to determine how much of a mortgage payment you can afford www.bankrate.com/calculators/mortgages/new-house-calculator.aspx
12. Extra. Use all extra money from commissions, bonuses, tax refunds, settlements, insurance payments, and other sources to pay down your student loan debt.
13. Loan. Consider applying for a FHA loan which requires a smaller down payment and less stringent mortgage approval requirements.

Will the July 1st Student Loan Changes Affect You

President Obama asked Congress to extend low student loan interest rates for another year. If Congress cannot come to an agreement and pass the bill, student loan interest rates for subsidized government Stafford loans will double increasing from 3.4 to 6.8% on July 1, 2012. However, the increase will only affect undergraduate students who are issued government loans after July 1, 2012.  Interest rates for existing loans will not be affected.  

The interest rate for subsidized loans which are based on economic need is fixed for the life of the loan.  You are not charged interest while you’re in school at least half-time and during grace periods and deferment.  However, a six-month grace period on interest charged on federal subsidized student loans has been suspended which will cause interest to accrue the day after a student graduates from college from July 1, 2012 through June 30, 2014. The interest rate for subsidized loans is fixed at 6.8% for graduate and professional degree students and will not be affected.

The interest rate for unsubsidized student loans is 6.8% and will not be affected.  Interest accrues on unsubsidized loans from the time it is disbursed. You can pay the interest while you are in school and during grace periods, deferment or forbearance, or you can allow the interest to accrue.  

For military service employees, the interest rate on loans obtained before entering military service may be capped at 6% during your military service. However, you need to contact your loan servicer to request this benefit. Interest is not charged for loans disbursed after October 1, 2008 for up to 60 months, while serving on active duty, serving in a hostile area, performing qualifying National Guard duty during a war or an emergency. 

Private loans may initially offer a low interest rate similar to a balance transfer credit card, but the interest rate is variable and can increase at any time. The Georgetown University Center on Education predicts that by 2018, approximately 63% of all jobs will require some graduate school education. Here are 9 tips to protect yourself from the July 1^st student loan changes:

1.     Consider going to a cheaper college.

2.     Create a budget and stick to it while you are in college. 

3.     Determine if you will be able to afford to make the minimum loan payments before applying for the student loans. 

4.     Think hard about your major and map out how you can pay back student loans on your starting salary.

5.     Extend school for 5 to 6 years by working a co-op.

6.     Pay for tuition for participating in a work-study program.

7.     Work during the summer and save a large portion of the money to pay for school.

8.     Work full-time and go to school part-time.

9.     Consider staying at home for 1-2 years after graduation to save money and pay down student loans.

10.  If you are on active duty verify the terms and conditions of your student loan and the benefits for military personnel.

Unexpected events occur frequently and it is best to plan ahead instead of waiting until the last minute or being blindsided.

A Life Raft for Student Loans

Starting on July 1, 2014 the federal Income-Based Repayment (IBR) program would allow existing student loan borrowers to reduce their monthly student loan payments from 15% to 10% of their income.

President Obama recently developed a proposal called “Pay As You Earn” is a revision of the current IBR program that will help recent graduates can reduce student loan payments to 10% of their income starting in 2012 and would assistance more than 1.6 million people. The “Pay As You Earn” will also make it easier to participate in the program and work to educate student loan borrowers on the program.

The IBR is a repayment plan that caps your required monthly student loan payments on the major types of federal student loans at an amount based on income, family size, and state residence and if the IBR payment is lower than your current student loan payment. If you are married and file jointly, your spouse’s income is considered for eligibility in the IBR program.

All Stafford, PLUS, and Consolidation Loans available through the Direct Loan or Federal Family Education Loan (FFEL) programs are eligible. Loans currently in default and Parent PLUS Loans are not eligible. The program may increase the length of the loan repayment and accrue additional interest over the life of the loan. The program is most helpful for recent graduates or those who make a modest income.

Student loan borrowers with multiple student loans are being encouraged by the Department of Education to consolidate their FFEL loans into the Direct Loan program. The terms and conditions of the loans would remain the same, and starting in January 2012, would allow borrowers to make only one monthly payment.

Borrowers who take advantage of consolidation may be eligible to receive up to a 0.5% reduction on their interest rate: a 0.25% interest rate reduction on consolidated FFEL loans and 0.25% interest rate reduction on the entire consolidated FFEL and Direct Loan balance.

Contact your student loan servicer to find out how to sign up for the IBR program. Provide your feedback to the Consumer Financial Protection Bureau and the Department of Education on the new “Know Before You Owe” project to create a financial aid disclosure form to help current and prospective college students better understand the type and amount of aid they qualify for and compare financial aid packages offered by different colleges which would outline their total estimated student loan debt, monthly loan payments after graduation and additional costs not covered by federal student aid.

How to Pay Defaulted Student Loans

Student loan debt is one of the hardest debts to pay off. Many Americans pay on their student loans well into their adult life. If your student loans go into default, it can take a while to get them into good standing. You risk having your tax refund taken, your paycheck garnished or being taken to court.

Federal loans have more regulations and programs to help account holders pay their student loan debt. Private loans are not as regulated and offer very few programs or none at all depending on the company to help account holders pay their student loan debt. You cannot include federal or student loans in bankruptcy. Here are 9 ways to get current on defaulted student loans.

Private loans
1. Offer a good faith payment or a lump sum payment to use as negotiation to request that any fees or finance charges be waived. Also, request that your payment history is updated on your credit report.
2. Refinance. After paying your loan on time for at least two years you can comparison shop and sell the loan to another loan servicer or bank for a better interest rate.
3. When private loans go into default they are usually forwarded to a collection agency which may not be as willing to work with you to setup a payment plan. Negotiate and offer a payment plan that you know you will be able to afford each month. If they refuse to accept your payment plan you may have to provide documentation such as a budget or paystub to support your payment plan.
4. You may be charged fees by the collection agency but no more than 18.5% of the outstanding principal and interest.
5. If you are in the military and are on active duty there are limits on interest accrual.
6. If the collection agency is not adhering to the Fair Debt Collections Practices Act file a complaint against the company with the Federal Trade Commission.
7. You can consolidate loans to use the student loan forgiveness (or public service forgiveness) programs.
8. Ask for a copy of the collection agency's business license, proof that they have a legal right to collect on the student loan and proof that you owe the amount stated on the letter you received.
9. If the school you attended closed or you withdrew from school you may be eligible for a partial refund by completing an unpaid refund discharge application form.

Federal loans
1. After making payments on time for 9-10 months, your loan will be placed in good standing (rehabilitated) and you will be eligible for various programs such as deferment, forbearance and student loan forgiveness.
2. Determine how much you can afford to pay each month. This may require that you create a budget and reduce some expenses to ensure you make the payments each month.
3. If your loan has not been sent to a collection agency, send a payment to the Department of Education's Payment Center.
4. You can consolidate your loans into one loan which will put your loan in good standing.
5. Don't consolidate federal loans into private loans because you will no longer be eligible for deferment, cancellation, forbearance or income-based payment plans.
6. You can consolidate your federal loans into the Direct Loans government consolidation program.
7. If you default on a Direct Loan you must make 3 payments or agree to pay the loan using the Income Contingent Repayment Plan (ICRP) or Income Based Repayment Plan (IBR). If you sign up for the ICRP or IBR you do not have to make 3 payments before applying for consolidation.
8. You can only consolidate a Direct Loan once.

Student Loan Help is Finally Here

The Income Based Repayment (IBR) is a new program created by Congress which reduces student loan payments based on your income similar to the Sallie Mae graduated payment program and was a result of the College Cost and Reduction Access Act of 2007. Annual student loan payments under IBR are capped at 15% of the borrower's income (adjusted gross income minus 150% of the poverty level for the borrower’s family size).

The IBR went into effect on July 1, 2009. Graduating seniors of the Class of 2009 are eligible for IBR within 2 months of graduation. Those who previously graduated or graduated before IBR took effect will have to wait to become eligible for IBR.

All federal student loans are eligible for the IBR program including subsidized and unsubsidized Federal Stafford loans; Federal Grad PLUS loans and Federal Direct Consolidation loans.

Another option to help pay federal student loan debt is loan forgiveness. Only Federal Direct loans (including Federal Direct Consolidation loans) are eligible for student loan forgiveness for public service.

Beginning October 1, 2007, borrowers who have Federal Direct loans may begin counting time in public service. Borrowers who have already consolidated their loans outside of Federal Direct must wait until July 1, 2008 to be eligible to "reconsolidate" into Federal Direct and begin counting time in public service.

For more information visit the Finaid website or Department of Education website.

If You Can't Pay Ask for Forgiveness

Many college students are struggling to pay back student loan debt due to lower paying jobs and difficulty in finding a job in this economy. The average college student graduates with over $20,000 in student loan debt and many also have credit card debt.

It can take an entire lifetime to pay back student loan and credit card debt if you just send in the minimum monthly payment. Some common solution are to live below your means, work multiple jobs, work overtime or live at home with your parents for as long as possible. However, there is another alternative, student loan forgiveness programs.

High school math and science teachers, and elementary and high school special education teachers who agree to work in low-economic areas for five years can get up to $17,500 forgiven in Stafford loans. The teachers have to teach full time for five consecutive years.

Visit the U.S. Department of Education website and complete the Cancellation and Deferment Option for Teachers form to see if you qualify.
The Office of Personnel Management (OPM) offers a Federal Student Loan Repayment Program the allows any federal agency to forgive up to $10,000 annually for your federal student loans up to a maximum amount of $60,000. For further details call OPM at 202-606-1800 or visit their website.


You can do volunteer work by joining the AmeriCorps, Peacecorps, or Vista. You can also get a job in a public service industry such as military service, public health, social work, emergency management, government, public safety, law enforcement, public interest law services, or child care.

If you have a Perkins loan you can have the loans discharged if you served in the U.S. Armed Forces. If you served in a hostile area or war area you can get fifty percent of your Perkins loans forgiven. More information about student loan forgiveness programs can be found at the FinAid website.

8 Simple Ways to Pay Off Student Loans Debt

I had student loan debt but luckily only ended owing $5,000 after I completed college thanks to family and scholarships. It took me forever just to pay that $5,000 due to all the interest on my loan. A recent study by the National Center for Education Statistics shows that 50% of recent college graduate have student loans, with an average student loan debt of $10,000. The average cost of college increases at twice the rate of inflation. Here are 8 tips to help with paying off student loan debt:

1. Develop a plan. Develop a plan to pay off your student loan debt before you graduate.
2. Save your money. Each summer throughout your college education, get a job or internship. Save half the money in a high interest savings account such as www.emigrantdirect.com (5.05%) or www.ing.com (4.5%). After a few months, consult a financial advisor to earn the highest possible return on your money. After college, you can use the money saved during all 4 years to pay down your college debt.
3. Use caution with consolidation. Consolidating student loans combines your loans into one payment but may or may not provide you with a lower interest rate. Do extensive research before consolidating your student loans. In addition, you may not be eligible for various student loan forgiveness programs if you consolidate your student loans.
4. Exchange work to reduce debt. Perform volunteer work or work for the following in exchange for reducing student loan debt: teaching in certain locations with low-income students or areas with shortage of teachers, providing legal and medical services in low-income areas or working for Americorps or the Peace Corps.
5. Get a work-study job. To help pay for the costs of college get a work-study job on campus to help defray the cost of college. Go to your campus employee office to ask about their work-study program. Work study Jobs pay at least the minimum wage for that state.
6. Apply for lots of scholarships. In recent years, money has been reduced from the budget for college scholarships so it is harder to get a scholarship to go to college. You can increase your changes of getting a scholarship by completing as many scholarship applications as you can. If you complete at least 50 you should receive at least 5 scholarships. Also, go to your campus financial aid office and ask about financial aid programs that the schools provides to students. Become friendly with the financial aid office employees who will alert you to financial aid programs when they become available. You can also search the internet for scholarships. Some scholarship websites are www.fastweb.com, www.scholarships.com, www.finaid.org, www.college-scholarships.com or www.scholarshiphelp.org.
7. Apply for grants. Apply for as many grants as possible. You can also apply for federal grants such as the Federal Pell Grant (Pell Grant), the Federal Supplemental Educational Opportunity Grant (FSEOG) Program, Leveraging Educational Assistance Partnership (LEAP), and National Science Scholars Program. Some grant websites are www.scholarships-ar-us.org/grants/, www.scholarships-ar-us.org/grants/women.htm, www.careersandcolleges.com.
8. Protect your credit. Try to avoid making late payments on your student loans, if you do this will be reported on your credit report and can remain for up to seven years. If you are having financial hardship call the student loan company and inform them of your situation, ask for a hardship or loan deferment to ensure your credit is not damaged until you are able to start making payments again.

For more information visit https://www.brokescholar.com/index.cfm/fuseaction/article.loanForgiveness/loanForgiveness.html or http://www.finaid.org/loans/forgiveness.phtml.

Harrine Freeman
CEO, H.E. Freeman Enterprises
www.hefreemanenterprises.com

Copyright © 2007 H.E. Freeman Enterprises