×

How to Get Your Financial “House” in Order to Afford Your First Home

Most of us enter adulthood with many goals and dreams. You may want a career that not only provides for a comfortable lifestyle, but also fulfills you personally. So naturally, you might seek an undergraduate or graduate degree that provides you with the education and skills to succeed in that career. Obtaining that college degree can help put you on the right path toward achieving your professional goals.

What about buying a home? You may be aware of the fact that you need a good credit score and a down payment to get started, but how do you get there? What is the path that leads to home ownership?

For many young adults, student loans play an important role in this equation. Even if you have a couple of degrees under your belt and you are earning a good income, saving to buy a house can seem out of reach when you are working to pay down student loan debt. In addition, you might be paying just the minimum each month, increasing your overall debt when you could be reducing it more quickly and getting closer to your goal of owning a home.

The good news is that there are ways to speed the process. As it turns out, there is a workable solution that could help you to get your finances in order and reduce monthly payments and perhaps overall student loan debt. With student loan refinancing, you can adjust your financial plan and head in the right direction, potentially reaching your goal of owning a home more quickly. Here is how you can benefit from this process.

Consolidation

The vast majority of students that rely on loans to pay tuition and other expenses during their time in college will find themselves holding a slew of loans after graduation. This means a lot of different payments and terms to contend with, which can be a real hassle.

With student loan consolidation, you may have the opportunity to combine all of your student loans into one, and this can deliver a variety of benefits, including:

  • Convenience
  • A single, lower interest rate
  • Lower monthly payments
  • Reduced overall debt
  • An improved debt-to-income ratio

Fixed Rates

Most college students do not pay a lot of attention to the finer points of their student loans when they accept them – they are more interested in merely getting the money needed to attend school. Once you start paying loans, however, details like rates and terms become a lot more important.

Over the past several years, variable interest rate loans have not proven particularly worrisome, thanks to historically low rates. However, you may have noticed that the prime rate has recently been on the rise, and this may affect anyone with variable rate loans.

When you consolidate loans, you have the opportunity to lock in a fixed interest rate for all of your student loan debt, eliminating any variable rates that could prove problematic when the economy improves and interest rates follow suit.

Low Rates Locked In

With the economy in recovery mode following the Great Recession, interest rates have recently been on the rise. What does this mean for anyone interested in student loan consolidation?

It simply means that seeking student loan refinancing now may help you to lock in lower rates. If you are even thinking about refinancing as a way to get one step closer to purchasing a home, now is the time to talk to a professional, take advantage of your good credit score and get the lowest rates you can qualify for in the event they continue to rise.

Students who have been holding out for student loan forgiveness may be concerned about the current administrations proposed changes to or eliminating these benefits.  By the time the new administration gets through health care reform, tax reform and whatever else is high on its agenda, you could have potentially made significant progress towards paying off your loans, especially if you were able to continue making payments after refinancing with a lower interest rate.

In other words, you’re on your own, and one of the best solutions to cut payments, reduce your debt-to-income ratio and improve your chances for a mortgage loan right now is with student loan consolidation and refinancing.

Don’t forget, mortgage interest rates are also going to follow the prime. If you are able to get in on a home purchase more quickly by reducing student loan payments now, you may also enjoy a lower rate on your mortgage loan, which could entail a huge savings over the course of a 30-year fixed loan.

Reduced Payments

One of the best things about student loan refinancing is that you have the potential to lower your monthly payments. If you are able to reduce interest rates for some or all of your student loans, you will naturally pay less every month, which leaves more money to put toward saving for a down payment on a home.

Of course, you might be wondering if this will end up costing you more in the long run, and this is a valid concern. Oftentimes, borrowers with high student loan debt accept a longer term for repayment in order to make their monthly payments more manageable, and this could result in additional interest accruing.

However, you don’t necessarily have to accept a longer term. If you reduce interest rates but choose a term for repayment that is roughly the same as what you had left on your initial student loan, you’ll still pay less each month and ALSO pay less over the life of your loan.

Student loan consolidation and refinancing is a win on every front for adults interested in finding ways to get their finances in order. When you want to buy a home and your student loan debt is standing in your way, student loan refinancing may help you reach your goal of home ownership more quickly.

Get Ready: Student Loan Rates Are on the Rise

Attending college is a privilege, but it’s one that every student has the right to enjoy. Of course, it doesn’t come for free, and depending on the college or university you select, it’s hardly cheap.

If you don’t have the cash in your coffers to pay for higher education, don’t despair. There are a variety of ways to secure the funds you need for schooling. Since many students can’t rely on scholarships or enough help from parents to pay for school, however, student loans are among the most common means of paying for a college education.

According to the office of Federal Student Aid, which administers FAFSA (Free Application for Federal Student Aid), more than 13 million students take advantage of federal funding each year, amounting to over $150 billion in grants, loans, and work-study opportunities to help them pay for tuition and other expenses. While some can get by on grants, parental assistance, and their own income, especially when they save money by living at home during college, millions of students rely on loans to make it to graduation.

Of course, students that take out loans will eventually have to repay them, which is why it’s important to be aware of student loan rates, and the fact that they can change annually. Since students have to reapply for student aid each year, this means your loan rates could go up, as they’re set to do in July of this year.

Student Loan Rates Over the Past Decade

According to the office of Federal Student Aid, the fixed interest rate for Direct Subsidized and Direct Unsubsidized Loans for undergraduates during the most recent school year (the period starting on or after 7/1/16 and before 7/1/17) was 3.76%. However, it wasn’t always this amount. The interest rates for federal student loans were determined each year by Congress (until 2013), and over the past ten years, rates for Direct Subsidized Loans for undergrad students have fluctuated quite a bit:

• 6.8% between 2006 and 2008
• 6.0% between 2008 and 2009
• 5.6% between 2009 and 2010
• 4.5% between 2010 and 2011
• 3.4% between 2011 and 2013
• 3.86% between 2013 and 2014
• 4.66% between 2014 and 2015
• 4.29% between 2015 and 2016

As you can see, there were years in which the student loan rates didn’t change at all, while some years the rates went down. Over the last ten years, the decreases and increases seem to coincide with economic factors such as the Great Recession.

According to a 2014 report released by the Economic Studies department at the Brookings Institute, there were, at the time, 7 million student loan borrowers in default, and that doesn’t even include those behind on payments in general. In addition, student loan debt became the second largest source of household debt following mortgage loans. Still, students continued to borrow, perhaps in the hopes that earning a degree would help them to secure a livable wage, despite economic woes and unemployment during the recession.

The result was what some deemed a student debt crisis, or alternately, a repayment crisis, and this is perhaps why Congress elected to lower fixed rates for some student loans during the recession and why President Obama expanded eligibility for the income-based, Pay As You Earn Program that helps borrowers that are trying to pay, despite financial distress.

Once the economy began to recover, however, student loan rates started to rise, as evidenced by increases in the 2013-14 and 2014-15 academic years. Rates took a slight dip again from 4.66% in the 2014-15 academic year to 4.29% in the 2015-16 school year, and then to 3.76% in the 2016-17 academic year. These fluctuations were based on the yields of 10-year U.S. Treasury Bonds, as they have been since 2013, and they will be moving into the future. This is why we’re going to see a rate hike in the coming year.

Student Loans Moving Forward

Based on the results of the May 10th auction of 10-year Treasury Bonds, interest rates on student loans will increase in the coming academic year, affecting loans taken out on or after July 1, 2017 and before July 1, 2018. Undergraduates taking out federal Direct Loans will see an increase to 4.45%, up just over 2/3 of a percent from last year.

This might not seem like a huge leap, and the upcoming fixed rate is still lower than it was seven of the last ten years, but it could make a big difference over the life of the average student loan repayment plan. The Nerd Wallet Student Loan Calculator shows that a 10-year loan of $20,000 at the 2016-17 interest rate of 3.76% will result in $4,026.02 in interest payments over the life of the loan (assuming regular monthly payments of $200.22). When you bump the rate up to 4.45% for the upcoming academic year, monthly payments go up just six bucks and change (to $206.80), but the cost in interest payments over the course of a 10-year loan swells to $4,815.41, an increase of $789.39.

Even so, students might not be terribly concerned about adding under a thousand dollars to the price tag. However, some students require far more than $20,000 a year in student loans, and if increases continue, each year could tack more onto already-high costs for the privilege of attending college.

What are students to do? There’s nothing you can do to lower federal interest rates, but you can find ways to cut costs, take fewer loans, and eventually, consolidate and refinance student loans.

If you’re lucky enough to get Direct Subsidized Loans, the federal government will pay the interest while you’re enrolled in school (at least half-time) and during a 6-month grace period following graduation (or after leaving school). After that, you will start accruing interest.

However, you always have the option to refinance student loans. As you earn money, pay down debt, and build a strong credit rating, you may find that you’re able to secure better and better rates on private loans. At some point, this could result in attractive refinancing options that lower rates and save you money over the life of your student loans.

Student Loan Facts 2018

For most people in the United States, the cost of going to college represents a huge financial burden. The Federal Student Aid Portfolio Summary, issued by the office of Federal Student Aid and quoting data provided by the National Student Loan Data System (NSLDS), states that as of Q3 2018 approximately 42.2 million people hold outstanding principal and interest balances on federal student loans. These loan types include Direct Loans, Perkins Loans and Federal Family Education Loans (FFEL).

 

It is important to know the facts about student loans before borrowing. The statistics overwhelmingly point to a growing debt problem. According to the Federal Reserve System, the amount of student loan debt increased by 5.6% in Q3 of 2018, when compared to Q3 of 2017. That may not sound like much until you discover this amount equates to roughly $83,482.32.

 

The facts do not get any easier to digest for college students in 2018. Whether they attend public or private universities, many students rely on loans for tuition and other expenses. If you are among the more than 42 million borrowers with outstanding student loan debt in the U.S., you might be interested in ways to save, such as through student loan refinancing.

 

Check Out Our Guide to Student Loan Refinancing

 

Here are some of the latest statistics to be aware of.

  • According to a report issued by the Federal Reserve System, student loans in the United States currently account for approximately $1.5 trillion in debt.
  • According to the Federal Reserve data, student loan balances increased in 2017 by about $1,490 billion or 5.8%.
  • The data also shows that there are about $84 billion dollars in default.
  • According to Student Debt Relief, there is about $106.5 billion borrowed for student loan debt each year.

A Closer Look at Student Loan Debt

 

As noted above, debt associated with federal student loans accounted for nearly $1.5 trillion as of Q3 2018. According to the Federal Student Aid Portfolio Summary.

 

Average Student Loan Debt Borrowed Per Year

Outstanding interest and principal balances for Q3 2018 are as follows:

  • Direct loans – 33.3 million borrowers, representing $1,116 billion
  • FFEL loans – 13.8 million borrowers, accounting for $288.6 billion
  • Perkins loans – 2.4 million borrowers with roughly $7.4 billion owed
  • Stafford subsidized loans – 29.1 million borrowers distributed among $274.2 billion, according to the office of Federal Student Aid Portfolio by Loan Type.
  • Stafford unsubsidized loans – 28 million borrowers, whose loans total $477.8 billion.

 

Debt management programs get a lot of attention these days. Given the student loan facts, you can see why. It’s important to note that a majority of student loans are in repayment.

 

The Direct Loan Portfolio by Repayment Plan report issued by the office of Federal Student Aid shows that several million borrowers with direct loans were in the process of repaying their loans as of Q3 2018, including

  • 10 Years Or Less – 11.12 million borrowers with a level repayment plan, owing about $205.1 billion
  • More Than 10 Years – 1.69 million borrowers with a level repayment plan, owing about $76.4 billion
  • Income-Based Repayment (IBR) Plans – about 2.85 million borrowers, owing about $168.5 billion

According to the Direct Loan Portfolio by Delinquency Status report from the office of Federal Student Aid, as of Q3 2018, approximately 3.35 million borrowers had loans in default, with loans totaling about $89.6 billion not yet being repaid. Of that default amount, a little under a million loans are so delinquent as to have been transferred to the Debt Management and Collections System (DMCS). According to this report, about 16.02 million borrowers with direct loans are current on payments, representing an estimated $570.5 billion in debt.

 

Federal vs. Private Student Loans

According to Student Debt Relief, students borrowed about $125.6 billion in non-federal and federal student loans in the 2010-11 academic year, a number that has fallen to $106.5 billion by the end of the 2016-17 academic year. The drop in money borrowed can possibly be attributed to fewer students attending college. In 2011 16.63 million students enrolled in college, but by 2016 that number had also fallen to 15.74 million in 2016. Fewer students enrolling in college could be the reason for the drop in money borrowed.

 

Debt vs. Type of School

According to the Federal Student Aid Portfolio Summary, of those who attended a Public institution 24.9 million students borrowed loans and 13.5 million students borrowed loans from a private institution in Q4 of 2018.

 

Student Loan Debt Trends

Student loans are not limited to undergraduates. An increasing number of individuals pursuing graduate and professional degrees are borrowing for graduate programs on top of what they already owe for undergrad degrees, according to statistics revealed in “The Graduate Student Debt Review,” published in 2014 by the New America Foundation Federal Education Budget Project.

 

If you combine undergraduate and graduate debt based on degree, the average MBA graduate owes $51,000, a Master of Education grad owes $50,879, a Master of Science grad owes $50,400, a Master of Arts grad owes $58,539, a Law grad owes $140,616, and a Medicine and Health Sciences grad owes $161,772.

 

The bottom line is, if you are borrowing, then know student loan facts. You can get all the details from lenders or the Federal Student Aid website, an office of the U.S. Department of Education. Finally, review the payment terms and repayment plan options for any student loan you’re considering, including student loan refinancing alternatives, so you can choose a loan that best suits your income bracket, finances, and lifestyle.

 

Signs It’s Time to Refinance Student Loan Debt

 

NOTICE: Third Party Web Sites
Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.