The Student Loans Pause is Over. Now What?

On March 25, 2020, the U.S. Congress passed a landmark legislation known as the CARES Act, which was subsequently signed into law on March 27, 2020. This pivotal act allocated a staggering $2.2 trillion in economic relief to counter the dire effects of the COVID-19 pandemic on the nation. Among its provisions, the CARES Act offered respite to individuals burdened with federal student loans by instituting a comprehensive pause on interest accrual and loan payments. However, this temporary relief has concluded, as interest began accumulating again on September 1, 2023, and payments are set to recommence on October 1, 2023. For those with outstanding federal student loans, now is the time to deliberate and strategize your repayment plan.

Exploring Student Loan Repayment Options: Federal student loans present various repayment options tailored to suit your unique financial circumstances. Here, we explain some of the most prevalent options:

• Standard Plan: This plan offers a fixed monthly payment, ensuring your loan is fully amortized within the specified loan term. Payments begin at a minimum of $50 per month and can extend up to 10 years, though consolidation may permit an extension to 30 years.
• Graduated Payment: Initially, this plan requires interest-only payments, gradually increasing every few years until your loan is fully repaid. The minimum payment starts at $30, with a maximum term of 10 years, extendable to 30 years through consolidation.
• Income Contingent Repayment: This plan calculates your payment as the lesser of 20% of your discretionary income or the amount equivalent to a 12-year term, adjusted based on your income. The minimum payment can be as low as $0, with a maximum term of 25 years.
• Income-Based Repayment: Payments under this plan are determined by 15% of your discretionary income, and borrowers must reapply annually. The minimum payment can be $0, and the maximum term is 25 years
• Pay As You Earn (PAYE): With this plan, your payment is based on 10% of your discretionary income, subject to annual reapplication. Similar to other plans, the minimum payment can be as low as $0, and the maximum term is 20 years.

For comprehensive details regarding repayment options and eligibility criteria, it is advisable to consult your loan servicer. Additionally, there may be specialized options available for borrowers facing unique challenges.

Federal Loan Forgiveness: Federal Student Loan Forgiveness has been a topic of widespread discussion. While a blanket forgiveness for all student loans seems unlikely, numerous avenues for forgiveness still exist. These typically encompass professions such as teachers, government employees, nonprofit workers, medical professionals, and individuals with disabilities. To delve deeper into loan forgiveness possibilities, explore the resources provided at studentaid.gov.

Qualifying for a Mortgage with Student Loans: In recent years, student loans have posed a growing obstacle for those aspiring to become homeowners. As the cost of education surpasses inflation and income growth, student loan debt has become an increasingly substantial portion of potential homebuyers’ budgets.

The leading mortgage agencies, including Fannie Mae, Freddie Mac, FHA, VA, and USDA, each have their own guidelines for calculating the monthly student loan payment amount used in mortgage qualification. Here are some key considerations:

• If you are actively repaying your student loans and not in deferment, most agencies will utilize the payment amount reported on your credit report or documented on your statement.

• In cases where student loans are in deferment, or no payment data is available on your credit report, agencies offer alternative calculation methods.

• Fannie Mae considers either 1% of the outstanding loan balance or the fully amortized payment.

• Freddie Mac, FHA, and USDA calculate based on 0.5% of the outstanding loan balance.

• VA adopts a unique approach, multiplying the total outstanding balance by 0.05 and then dividing by 12.

In certain circumstances, it may be possible to exclude the monthly student loan payment altogether, especially if you anticipate loan forgiveness or discharge. To explore these options, communicate your situation to your loan officer.

Conclusion: As we’ve illustrated, student loans are exerting an increasing influence on mortgage qualification, and this trend is anticipated to persist. The most prudent course of action is to establish a well-defined budget and diligently work toward reducing excessive debt. Should you have inquiries or require a comprehensive mortgage qualification analysis, don’t hesitate to contact Capital City Mortgage. Our team stands ready to assist you in crafting a plan to realize your homeownership aspirations while managing your student loan obligations. Your financial freedom awaits.