Student Loans

Student Loans - Federal student loans provide college students will money for tuition, books, and living expenses. A large number of college students receive financial assistance from a grant, work-study program, or Federal student loan. Unlike Federal student loans, which can take several months to process and disburse, private student loans offer quick processing, and the money is normally distributed to the student within five business days. Federal student loans place limits on how disbursed money is used. 

 

While private student loans offer flexibility and quick processing, getting approved for such loans is no easy task. Private student loans are quite the opposite.  

Understand deferred student loan repayment rules

 

Even if you merely transfer to a new college, you don't always need to start repaying your loans right away. Federal Stafford loans, among others, for the period of time you are registered as a full-time or part-time student.  

Your best plan of action to defer student loans by returning to school is

Review your loan documents, your financial aid package you received when first enrolled in college, copies of Federal Stafford loans and all the private loans you signed for and owe money on. A deferment on existing student loans remains one of the best ways you can put your student loan payments on hold. It is estimated that in 2012, Student Loan debt exceeded one trillion dollars (CollegeBoard.org). The average student loan debt per person is nearly $30,000 (Federal Reserve Bank of New York, 2013).

This debt to income ratio is called the back end debt ratio. Below is an example of two different buyers, one with average student loan debt of $30,000 with the standard 10 year pay back option and one without student loans.

Back End Debt Ratio

Under this guideline 43% of the borrower's monthly income ($4000) can be used towards all their debts (mortgage, auto, credit card debt, and student loans).

Example 1: (Buyer without student loans)

$4000 (monthly income) x 43% = $1720 (total allowed debt monthly)

Debts

Auto $350 + credit cards $150 = $500 debts (excluding mortgage obligation)

$1720 (total allowed monthly debt) - $500 (debts) = $1220 or $142,000 in available mortgaging power *

Example 2: (buyer with average student loan debt of $30,000)

Debts

Auto $350 + credit cards $150 + student loan $342 (based on 10 year payback @ 6.65%) = $842 debts (excluding mortgage obligation)

The borrower with the average student loan debt has a whopping $68,000 less in mortgaging power.

One solution is for potential homebuyers who have student loans, are the Income Based Repayment plans. According to the Federal Student Loan Aid website, Income Contingent Repayment plan payments are calculated based on adjusted gross income, family size, and the total amount of Direct Loans. The Income Sensitive Repayment plan calculates monthly payments based on annual income.

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