Are Your Student Loans Limiting Your Choices?
Student loans are a reality for more and more people in the workforce. The higher total dollars owed in student loan debt that so many face mean that carrying that debt is a part of your financial life for years after you graduate from college.
Making larger purchases like buying a car or home or business can be hindered by student loan debt. There are things you can do to improve your situation so that you can make those purchases and move forward in your life. Here are ideas for ways to keep your student loans from holding you back.
Getting the monkey off your back
Like many people, you may have put off buying a house or a car because you’re overburdened with student loan debt. So what can you do to improve your situation? Here are some suggestions to consider:
Pay off your student loan debt as fast as possible. Doing so will reduce your debt-to-income ratio, even if your income doesn’t increase.
If you’re struggling to repay your student loans and are considering asking for a forbearance, ask your lender instead to allow you to make interest-only payments. Your principal balance may not go down, but it won’t go up, either.
Ask your lender about a graduated repayment option. In this arrangement, the term of your student loan remains the same, but your payments are smaller in the beginning years and larger in the later years. Lowering your payments in the early years may improve your debt-to-income ratio, and larger payments later may not adversely affect you if your income increases as well.
If you’re really strapped, explore extended or income-sensitive repayment options. Extended repayment options extend the term you have to repay your loans. Over the longer term, you’ll pay a greater amount of interest, but your monthly payments will be smaller, thus improving your debt-to-income ratio. Income-sensitive plans tie your monthly payment to your level of income; the lower your income, the lower your payment. This also may improve your debt-to-income ratio.
If you have several student loans, consider consolidating them through a student loan consolidation program. This won’t reduce your total debt, but a larger loan may offer a longer repayment term or a better interest rate. While you’ll pay more total interest over the course of a longer term, you’ll also lower your monthly payment, which in turn will lower your debt-to-income ratio.
If you’re in default on your student loans, don’t ignore them–they aren’t going to go away. Student loans generally cannot be discharged even in bankruptcy. Ask your lender about loan rehabilitation programs; successful completion of such programs can remove default status notations on your credit reports.
– via 360 Degrees of Financial Literacy
Understanding How This Works
If you have a good credit score and don’t understand why your student loan debt is keeping you from getting a mortgage, here is an explanation of how lenders evaluate your ability to pay and how student loans enter that picture.
Especially for mortgages, your debt-to-income ratio is vitally important. This number represents all your monthly payments compared to your monthly pretax income. For instance, let’s says you make $4,000 per month before taxes. You have $300 in minimum payments on your credit cards and $600 in student loans. You have total of $900 of debt payments each month. $900/$4,000 equals 22.5 percent. To meet the Federal Housing Administration loans (FHA) standards for home ownership, you’d have to have a debt to income ratio including your mortgage payment “(principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.)” of 43 percent or less. You’d have to stick to homes where your total mortgage payment would be $820 or less…
…If your student loans are federal, you might be able to change repayment plans to reduce the payment. For instance, you borrowed $50,000 in federal student loans at 6.8 percent, your payment could range from under $200 to just under $600. The highest amount is on a 10-year repayment plan while the lowest is based on income on the Pay as You Earn Plan…
– via Forbes
Do you have student loans? Have you done everything you can to put yourself in the best possible credit situation?