Are Student Loans The Next Mortgage Crisis?
This watchdog thinks that student loans are the next mortgage crisis.
Here’s what you need to know.
Student Loans: Watchdog
Mike Calhoun, who runs the nonprofit Center for Responsible Lending, sees many similarities between the 2007-2008 mortgage crisis and today’s student loans. The latest student loan debt statistics show that there are approximately 45 million borrowers who collectively owe $1.6 trillion. That makes student loan debt the second-highest consumer debt category.
Calhoun shared his perspectives, among others, with NPR:
- Like the mortgage crisis, Calhoun says there is a disconnect between the amount of student loan debt borrowed and the borrower’s ability to pay off student loans.
- Like the mortgage crisis, minority groups have been disproportionately impacted by student loan defaults.
- Student loan debt is hurting borrowers credit scores, which hurts their ability to obtain a mortgage.
- Like the mortgage crisis, loan servicers are not advising borrowers properly on the correct student loan forgiveness and student loan repayment options to avoid student loan default.
Student Loans: Potential Solutions
There is no shortage of proactive measures to help solve the nation’s student loan debt issue. Policymakers, legislators, presidential candidates and the private sector have all proposed solutions to mitigate the impact of any repeat of the mortgage crisis.
Here are a few steps you can take:
Income-Driven Repayment: If you are struggling to pay off federal student loans, enroll in an income-driven repayment plan. Income-driven plan such as Income-Based Repayment (IBR) or Revised Pay As You Earn (REPAYE), for example, lower your monthly payment based on your discretionary income. This can help provide relief in the short-term, although interest will accrue on your federal loans. You also may be eligible for student loan forgiveness on your remaining federal student loan balance after 20 to 25 years.
Student Loan Forgiveness: Public Service Loan Forgiveness is the federal government’s primary program that will forgive all your federal student loans. You have to meet all the requirements, which includes making 120 monthly payments while you work for a qualified public service or non-profit employer. Don’t fall for companies that promise to forgive all your student loans – they don’t exist.
Borrow Responsibly: The best way to borrow for college or graduate school is to borrow responsibly. Pay for higher education with funds in this order: grants and scholarships first, then federal student loans and then private student loans. Importantly, scholarships and grants don’t have to be paid back, and federal student loans come with borrower protections. Private student loans are a good option too. A qualified co-signer can help you get a lower interest rate. Private student loan interest rates often can be lower than interest rates for federal student loans, depending on you or co-signer’s credit score and income.
Lump-Sum Payment: You can pay off student loans faster if you make extra lump-sum payments. You don’t only have to pay the minimum payment. If you have extra income of any amount, make an extra student loan payment. Extra sources of income could include a bonus, a tax refund or a holiday gift. Inform your student loan servicer in writing to apply the lump-sum payment to your principal balance only (not your next month’s payment) so you can reduce the amount of interest you owe.
This lump-sum payment calculator shows you how much you can save when you make a lump-sum payment on your student loans.
Refinance Student Loans: You can lower your interest rate when you refinance student loans with a private lender. Lower interest rates mean you can lower your monthly payment and save thousands of dollars in interest. The best time to refinance student loans is whenever you can get a lower interest rate than your current interest rate. It costs nothing to apply and there are no prepayment penalties, so you can pay off student loans early. You can also keep refinancing as often as you like, so long as you can get a lower interest rate. Student loan refinance rates are now ridiculously cheap and start at 1.9%.
This student loan refinancing calculator shows you how much you can save.