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Home Sales Drop Could It Be Due to Student Debt Crisis?

October 31, 2018

An eager young couple working together to afford their first home, a young family moving back in with the in-laws, or a recent college grad moving back home after school. These are the stories that have become oh so common in the United States. As the student loan debt crisis in America continues to grow, the homeownership rate has fallen specifically in younger generations. Student loan debt has increased to $1.5 Trillion in 2018 according to the Federal Reserve Bank.  The sales for homes continues to decline hitting its’ lowest number since 2015 according to a study by National Association of Realtors. According to the survey, more than seven in ten student loan borrowers believe that student loan debt has impacted their ability to purchase a home or take a vacation.

 

Many adult children have had to move home and put off their own dreams to pay down education costs like student loan debt. The daydream of one day buying their first home is becoming just that, a dream. Due to the immense amount of debt acquired during college, it just doesn’t seem possible for people to own their own homes. Let’s take a look at factors affecting borrowers and how they are dealing with housing due to student loan debt.

 

The Feds

Is it possible that student loan borrowers have been placed in tough financial situations in part because of the Federal government’s model for the loans they provided during the 90s and 2000s? The Federal Government provided Stafford and Perkins loans to everyone at the same rate regardless of credit history. If you took out a loan with a private borrower, that lender would evaluate your ability to pay that loan back and would provide you with an amount they saw as acceptable. When providing loans to everybody regardless of credit history, the risk to the borrower is increased. Private institutions operate under guidelines and regulations that require they have “some skin in the game” to prevent risky lending.

 

Many borrowers see public service and not-for-profit jobs as a promising opportunity. Borrowers accept jobs in the public and nonprofit sector hoping to have their Federal student loans forgiven, not realizing the stringent requirement for eligibility to the Public Loan Forgiveness Program.  A recent report released on Septembers 19, 2018 by the Federal Student Aid a Department of the U.S. showed that 99% of borrowers have been rejected for the program. News of the rejection has borrowers feeling helpless with a lack of financial literacy.

 

Transparency

Only one in five borrowers understood all the costs including tuition, fees, and housing according to the NAR survey. Borrowers were using loans for tuitions costs and did not fully understand the amount in which they were borrowing. The lack of responsibility on the borrower can be on part due to the lack of financial understanding and education. Financial literacy continues to become a recurring theme throughout the student loan debt crisis. Many borrowers lack the financial know-how for the most efficient ways to pay down student loan debt. The financial knowledge needed to handle debt, and the rising cost of college tuition has not worked to the advantage of student loan debt borrowers. According to the survey, 32% of student loan borrowers had defaulted or entered into forbearance on their student loan debt.

 

Financial Literacy

Forbearance, deferment, Income-Based Repayment, and student loan grace period are commonly used when paying down student loan debt. What most borrowers don’t know is that unless you have a specific type of federal student loan debt, interest is accruing during this time period. The interest that accrues on your loan during these repayment periods can really end up costing you in the long run. In addition to the lack of knowledge on how to handle the debt, borrowers are unaware of opportunities like student loan refinancing.

 

Paying Down Debt & Housing

Now that we understand a bit more about how student loan debt has gotten to where it is now let’s see how borrowers are dealing with the debt and what their housing situations look like.

 

Moving Back Home

We all know at least one or maybe two young people who have moved back in with a family member after graduating from college. It has become fairly common for college graduates to move back home due to the vast amount of debt and “empty nest” syndrome parents often face. What can differ between households is whether the graduate pay rent to the family or friend in which they have moved in with.

 

Renting

According to the National Center for Education Statistics student loan debt has grown from 5% to 30% of all household debt. Since 2008 the cost of college has risen. This increase in debt has caused an increase in renting. Equifax surveyed millennial renters asking why they didn’t buy a home and 55.7% of respondents listed “student loan debt/not enough money saved” as their reason for renting.  If a student loan debt holder can afford a mortgage payment typically they cannot save for the down payment that is required.

 

Potential homebuyers are having trouble finding homes they can afford according to CNBC. Due to this difficulty, many people are finding themselves renting for longer periods than they would have hoped. National apartment occupancy sits at 95% as of 2017.

 

The Housing Market

As mortgage rates continue to increase so too, does the cost of homes. Both these factors continue to cause a drop in the sales. For example, sales of single-family homes, co-ops, and condominiums have dropped 3.4% from the prior month. Houses have become unaffordable and those with student loan debt cannot find the additional savings for the down payment needed. This drop in home sales could have a strong effect on the market.

 

Looking Forward

 

Employer Benefit Programs

First-time homebuyers should not feel discouraged as there are still many options available. Employers have been stepping up to help employees who are carrying student loan debt by offering benefit student loan debt assistance programs. These programs help borrowers receive resources that they need to pay down debt faster. In addition, the programs give employers the ability to share contributions towards the student loan debt of their employees.

 

Student Loan Refinancing

Borrowers with above 650 credit score and steady income may qualify to refinance their student loan debt. Refinancing student loan debt would allow borrowers to select their repayment terms and could offer a lower interest rate. A lower interest rate on student loans could save thousands over the life of the loan.

 

Education

Secondary institutions and lenders need to better educate borrowers on terms and best practices on paying down debt.  The more resources that can be provided to borrowers the better off that borrower is. In addition, borrowers should not count on qualifying for the Public Student Loan Forgiveness program. Financial literacy also should be addressed to students at young ages. The more we can educate our youth of responsible lending the better off the United States economy can be.

 

Learn More About the State of Student Loan Debt in America Today

 

 

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2019-12-09
This Week in Student Loans: December 9

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:

Department of Education Proposes That New Entity Handle Student Loan Debt

On Tuesday of this week, the Trump administration and Department of Education (DOE) Secretary Betsy DeVos proposed that a new, independent entity manage the federal student loan portfolio, rather than the Department of Education’s Office of Federal Student Aid. Devos proposed the move at a conference this week, calling for a “stand-alone government corporation, run by a professional, expert and apolitical board of governors.”

 

When asked why they believe the federal student loan portfolio should be managed outside of the DOE, Devos claimed that the DOE was never set up by Congress to be a bank, but claims that’s effectively what they are.

 

In order to make this happen, laws would have to be passed that would separate the Office of Federal Student Aid from the DOE in order for it to be a stand-alone entity.

 

Source: Yahoo News

 

Lawmakers Call for Investigation of Federal Loan Discharge Program for Disabled Borrowers

With plenty of heat surrounding allegations against the U.S. government’s Public Service Loan Forgiveness Program for not making the qualification requirements clear, a new federal program is under fire from lawmakers this week – this one meant to forgive student loans of borrowers with “significant, permanent disabilities.” An NPR report recently revealed that the program wasn’t helping a large portion of borrowers who were eligible.

 

This loan discharge program is specifically meant to help individuals who have the most severe type of disability: Medical Improvement Not Expected (MINE). The Education Department finds eligible borrowers by comparing federal student loan records with the Social Security Administration records, then sends a letter to these disabled individuals and requires them to apply in order to have their loans discharged. The controversy lies in that that many of these borrowers are unable to apply or may not be aware of the notice they received. The NPR report revealed that only 36% of eligible borrowers have had their student loans discharged.

 

Source: NPR

 

Trump Calls on Aides for Plan to Tackle Student Debt

With Democrats such as Elizabeth Warren making bold claims for tackling student debt in the US, President Trump has called on his administration to put together a “blueprint” for how they will manage the student debt crisis. The Washington Post claims that Trump is calling for this plan as a method to combat “anxieties that Democrats such as Warren will tap into populist impulses that propelled his 2016 victory,” and that “he will need policies beyond his signature areas of immigration and trade to counter them.”

 

Source: The Washington Post

 

Rand Paul Wants You to Use Your 401k to Pay Off Student Loans

Senator Rand Paul (R-KY) recently proposed a legislative act that would allow individuals to use pre-tax money from their 401k to pay off student loans, or even pay for college. The HELPER Act (Higher Education Loan Payment and Enhanced Retirement), is an initiative by Paul to “reshape the way people save for higher education, driven through tax and savings incentives,” says Forbes writer Zack Friedman.

 

Key takeaways from the act would include the ability to withdraw $5,250 from your 401(k) or IRA annually to pay off debt or pay for college, the ability to pay tuition and expenses for a dependent or spouse, tax-free employer-sponsored student loan and tuition plans, and a removal of the cap on student loan interest reduction.

 

Source: Forbes

 
 

Notice About Third Party Websites: 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.

2019-12-05
Student Loan Interest vs. Other Interest Types

By Caroline Farhat  

If you have student loans, you’ve probably been told at one point that it’s “good” debt. But what does that really mean? Is any debt actually good or is it all bad? Is the interest you pay on your student loans better than the interest you pay on your auto loan? 

 

As you accumulate more assets, you’ll encounter many different types of interest. It’s helpful to know how each type of interest differs so that you know exactly what you’re getting into when you borrow money. 

What is Student Loan Interest?

Student loan interest is essentially the cost you pay for borrowing the money. When you pay interest, you will be paying back the amount of money you borrowed plus the cost to borrow the money (the interest). The higher the interest rate, the more money you will have to pay in addition to the amount you borrowed. The amount you borrow is called the principal and the cost to borrow the money is called the interest. Interest is charged on both federal student loans and private student loans until the loan is paid in full. When you make a payment on a loan the interest is paid first, any amount of the payment over the interest is applied to the principal and lowers the balance of the loan. The types of rates and how interest is calculated are based on the type of student loan.  

 

Federal Student Loans: The Difference Between Subsidized and Unsubsidized

Federal student loans have fixed interest rates that are set by the government. They remain the same throughout the life of the loan. Also, federal student loan interest rates may be lower than auto loans or personal loans. Federal student loans have two different types of interest: subsidized interest and unsubsidized interest. A subsidized interest loan means the government pays the interest on the loan while you are in school or during deferment (a grace period from federal student loan payments granted for certain situations), which means the balance of the loan does not increase. Once you are out of school or the deferment period ends, you will be responsible for paying the interest on the loan. An unsubsidized federal student loan means the interest starts accruing from the day the loan is first disbursed. Although you may not be required to make payments on the loan while you are in school, you will end up with a loan balance higher than you initially borrowed. The interest on a federal student loan is calculated using the simple interest formula. Here is how to calculate the simple interest formula:

 

The principal (the amount of money you borrowed) X the interest rate = The amount of interest you will pay each year for the loan

 

Private Student Loans: The 411 on Fixed and Variable Interest Rates

Private student loans can have a variable interest rate or a fixed interest rate. A variable interest rate is based on the current market and economy and can change over the life of the loan. A fixed interest rate remains the same throughout the life of the loan. It’s important to note that rates can vary widely based on the student loan lender, which is why it is so important to do your research and only sign with a reputable company. The interest rate you receive on a private student loan is also based on certain financial factors, including your credit score. 

 

For example, ELFI customers who refinanced student loans report saving an average of $309 every month¹. If you currently have private student loans, you can check out our student loan refinance calculator to get an estimated rate and monthly payment for both fixed and variable options.² Whether you’ve taken out federal student loans or private student loans throughout your college journey, consolidating and refinancing could score you some significant savings.

 

Interest On Other Common Loans

If you’re in full adulting mode, odds are you have or are considering getting an auto loan or mortgage. Just like your student loans, these financial products come with interest as well. 

 

Interest rates on car loans can be variable or fixed rates and the rate you receive is based on factors such as your credit score and financial health. There are two ways interest is calculated on car loans: simple or precomputed. For simple interest, the interest is calculated based on the balance of the loan. If you pay extra on your car loan, the principal will be reduced and in the long run, you will be saving money in interest (woohoo). If you have a precomputed interest loan on a car, it will be calculated on the total amount of the loan in advance. This means that even if you make extra payments, you will not save any money on the interest over time. One big difference to note between student loan interest and auto loan interest is how it can affect your taxes. With student loans, the interest you pay may be a tax deduction you can take depending on your income and the amount of interest you have paid. With an auto loan, there is no such benefit.    

 

Interest on a house loan, otherwise known as a mortgage, is calculated similar to a simple interest car loan. An interest rate on a mortgage may be variable or fixed depending on which type of loan you choose. There are two major types of mortgage loans: 

  1. Principal and interest loans - You pay back the interest and the principal (the amount of money you borrowed) at the same time. This is the most common type of mortgage.
  2. Interest-only loans - This is when, for a certain period of time, payments towards the loan only go towards paying off the interest on the loan.
 

Mortgage loans are amortized, like some student loans, which means your payment goes towards more interest upfront. Then as the balance decreases, you pay less interest and the payment goes towards paying down the principal. Also, just as with some student loans, some of the interest you pay on your mortgage may be tax-deductible. 

 

Understanding Interest Can Pay Off

It’s important to understand the different types of interests and loans when determining which debt to focus on paying off first. Being strategic about how and when you pay off your debt can save you hundreds and even thousands of dollars. A good rule of thumb is to pay off the debt with the highest interest rate and then focus on your interest rate debt. Of course, if you have the option to refinance, explore that first and then develop your debt reduction plan.

 
 

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

²Subject to credit approval. Terms and conditions apply. Variable rates may increase after closing.

  Notice About Third Party Websites: 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.
2019-12-04
Tips for Starting Your Student Loan Repayment Journey

Once you graduate from college, leave college, or drop below half-time enrollment, it’s time to start thinking about when your student loan repayment period kicks in. Understanding the repayment process for your student loans is very important for a number of reasons – for one, if you don’t pay, your interest will accrue. Second, if you don’t pay, it will affect your credit score, which can hinder your ability to buy a home, buy a car, qualify for credit cards, take out a personal loan, or refinance your student loans.   If you graduated this past spring, your student loan repayment period will likely start around this time of year (if they haven’t kicked in already). Follow these tips to master student loan repayment and get yourself to a strong financial start after college.  

Know How to Access Your Loan Information

A good first step is to acquire your loan information. This can typically be accessed via an online login. Monitoring your loan information will be essential during the course of repayment. If you took out Federal Student Loans, you can likely access your info at https://myfedloan.org/. If you took out private student loans, check with your lender for how to access your information. Tracking your loans will give you a gage on the status of each loan, the balance you owe, as well as interest rates for each loan. By understanding the status of your loans, you can make more informed decisions about how you want to prioritize repayment, what type of repayment plan you want to choose, or even whether you want to consolidate or refinance your student loans.   

Know When Your Payments Start

Immediately following graduation, you’ll likely have a grace period, or a period of time before your first payment is due. This can vary depending on the type of loan you have, and they can be different for each loan. Subsidized and Unsubsidized Federal loans have a six-month grace period. Perkins loans have a nine-month grace period. There is no grace period for PLUS loans; however, if you are a graduate or professional student PLUS borrower, you do not have to make any payments while you are enrolled at least half time and (for Direct PLUS loans first disbursed on or after July 1, 2008) for an additional 6 months after you graduate or drop below half-time enrollment. Private student loans will have differing grace periods so contact your loan servicer for more details. Knowing when your loan will be due is imperative to starting off on the right foot when it comes to your student loans.  

Weigh Repayment Options

When you take out federal student loans and your grace period is complete, you will automatically enter the Standard Repayment Plan. This plan allows you to pay off your debt within 10 years, with the monthly payment remaining the same over the life of the loan. If standard repayment doesn’t work for your budget, you may want to consider some other options, or perhaps even refinance your student loans. The federal student loan program offers the following Income-Based Repayment plans: 
  • Graduated Repayment Plan – Gives you a smaller payment amount in the beginning and gradually increases the payment amount every two years.
  • Extended Repayment Plan – Allows you to pay the least possible amount per month for 10 to 25 years.
  • Revised Pay As You Earn Repayment Plan or REPAYE Plan – Bases the monthly payment on you (and spouse’s) adjusted gross income, family size, and state of residence.
  • Pay As You Earn or PAYE – Monthly payments are based on your adjusted gross income and family size. You must be experiencing a financial hardship to qualify. You must also be considered a “new borrower” as of 10/1/2007 or after, or be someone who received an eligible Direct Loan disbursement on 10/1/2011 or after.
  • Income-Based Repayment or IBR – Monthly payments based on your adjusted gross income and family size. Must be experiencing a financial hardship to qualify.
  • Income-Contingent Repayment or ICR – Based on your monthly adjusted gross income and family size. Typically chosen if an individual can’t qualify for the Pay As You Earn Plan or Income-Based Repayment.Any changes to your income or your spouse’s income will affect your student loan payment. For example, if your salary increases, your student loan payment will as well. If you are married, both your income and your partner’s income are combined. Two combined incomes will increase your total income, likely increasing your monthly payment. 
  Keep in mind that each repayment option will have positives, negatives, as well as eligibility requirements. Research each option before making a decision, and consider contacting your loan servicer if you have questions or need more information.   

Automate Your Payments (If you can)

Setting up automatic payments will make student loan repayment less of a hassle, will avoid late payments, and may even score you an interest rate reduction. Just be sure you have enough money in your account month-to-month to endure the payments without overdrawing.   

Make Extra Payments

When you make your monthly payment, it will first apply to any late fees you have, then it will apply to interest. After these items are covered, the remaining payment will go toward your principal loan balance (the amount you actually borrowed). By paying down the principal, you reduce the amount of interest that you pay over the life of the loan. Applying extra income by making larger payments or double payments will reduce the total amount you’ll end up paying.   

Reach Out for Help if Necessary

If you’re having trouble making your monthly payments, particularly on your federal student loans, contact your loan servicer. They will work with you to find a repayment plan you can manage or help determine your eligibility for deferment or forbearance. If you stop making payments without getting a deferment or forbearance, you risk your loan going into default, which can have serious consequences to your credit.   

Weigh Refinancing & Consolidation Options

If you have multiple student loans that are all accruing interest at different rates, you may want to consider student loan refinancing or consolidation to make repayment more manageable. The federal student loan program offers student loan consolidation, in which they combine your loans into one loan with a weighted average interest rate, rounded up to the nearest 1/8th percent. You can also consolidate your federal and/or private student loan with a private lender through the process of refinancing. Refinancing your student loans is much like consolidation, however it offers the opportunity to start new repayment terms and possibly lower your interest rate. Keep in mind that refinancing with a private lender may cause you to lose access to certain federal student loan repayment options that are listed above.   

Look Into Loan Forgiveness

If you work in a public service position or for a non-profit, you may want to consider the Public Service Loan Forgiveness program or another loan forgiveness program offered by the federal government. Other options exist for volunteers, military recruits, medical personnel, etc. Some state, school, and private programs also offer loan forgiveness. Check with your school or loan servicer to see if you may qualify for student loan forgiveness.  

Earn Your Tax Benefits

If you are paying your student loans, you may be able to deduct the interest you pay on your student loans when filing your taxes. Deductions reduce your tax liability, saving you money and serving as a nice tradeoff for having to pay interest on your student loans.    Repayment of student loans can be a long, difficult journey – but by taking advantage of your resources and staying determined to pay off your debt, it is manageable. If you need more information on paying back your student loans or the options that are available to you, contact your loan servicer.  
  Notice About Third Party Websites: 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.