This week’s edition of Motto Moment, John Kunkel addresses student loans, and how they impact credit and borrowing capacity when purchasing a home.
Q: How do student loans impact borrowing capacity?
A: Student loans are deferred due to the pandemic; however, it does appear that student loan payments
will restart in September. For those making payments before the pandemic, calling your servicer and confirming they are still servicing your student loans or if another servicing company has purchased them is essential. For instance, many with Great Lakes have been moved to Nelnet.
Many carry the burden of student loan debt and must proactively work with their loan servicer to set up payment plans that meet their budget and long-term goals. Unlike other types of debt, not even bankruptcy will erase student loans. According to Forbes, total student debt stands at $1.75 trillion.
Q: Can this tremendous amount of student debt stress and limit the buying power in the market?
A: It is much debt and can prevent some from getting ahead. Not only recent students but those who have been in the workforce for years are still paying student loans. US News reports there are several
repayment options one may choose when it comes time to repay student loans. Now these payment plans are for federal and not private loans. For the standard repayment plan, payments are fixed and stay the same for ten years, and all borrowers are eligible for this plan. For the graduated payment plan, payments start lower and increase over time, typically every two years, for a total repayment period of 10 years, and all borrowers are also eligible for this plan.
Another option is an extended repayment plan in which borrowers with more than $30,000 in federal student loan debt may be eligible to extend their repayment period to 25 years. The extended repayments can either be fixed or graduated.
One of the most common plans for those with low to modest incomes is the Income-driven repayment plan or the pay-as-you- earn. Payments are limited to a percentage of your discretionary income, and any outstanding loan balance is forgiven after 20 or 25 years. There are several pay-as-you-earn programs, and each has its eligibility requirements.
Speak with your loan servicer and discuss which repayment plan best fits your needs. One can find out more about payment plans by visiting studentaid.gov and applying for the program that is best for them.
When applying for a mortgage, lenders consider .5 to 1% of total deferred student debt as a payment. This means if you have $50,000 in student loan debt, the lender could consider up to $500 as a monthly
payment, and this can be a challenge when qualifying for a mortgage due to the debt-to-income (dti) ratio. By having a set payment plan with your student loan servicer, one will likely have a lower DTI and have a better potential of affording a mortgage. Don’t let the burden of student loans prevent you from enjoying your career, your life, and being a homeowner. You have a greater chance of owning your home by choosing a repayment plan that meets your budget and aligns your
debt-to-income.
Be proactive and find out who your student loan servicer is and contact them. Don’t wait until the payments are due. Late payments on student loans will have a strong negative impact on your credit.
I strongly support and encourage everyone to consider community colleges for their basics. There are now high- school programs that allow students to complete college-level courses before graduating. Take as many courses as possible at your local community colleges and enjoy lower tuition and smaller class sizes.
This has been your weekly Motto Moment with John. If you have questions or if I can help unlock the home of your dreams, give me a call at 479-621-3500. Let me preapprove you for your first home, dream home, investment property, or farm. Having a pre-approval letter makes you much more likely to get your offer accepted in this hot real estate market. I’m John Kunkel, your Motto Mortgage Loan Officer. Unlocking homeownership dreams one key at a time.
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