Student loans have become a core part of many Americans’ financial lives. In 2019, the amount of student debt in America has surpassed the amount of credit card debt and auto loans combined. With over 70% of all students utilizing student debt to finance their education and with borrowers owing a cumulative 1.5 trillion dollars, student loans have become deeply embedded in the American economic system.
Carrying student debt isn’t necessarily a negative mark against your financial health. In fact, student debt can be an excellent investment in your future, boosting your earning potential and granting you the opportunity for new life experiences. The debt is more than just a one-time transaction though and has repercussions throughout your future financial life. For those who have student loan debt, it is important to understand how these loans can impact access to credit in the future and how to best manage these debts going forward.
How Students Loans Can Impact Access to Credit
There is no one-size-fits-all approach when it comes to determining how a lender may evaluate your student loan debt burden. Each lender will have their own perspective on how to view student debt and your credit application more broadly. While it is unclear how a specific lender will treat your exact situation, in general lenders like to see applicants who have the ability to make timely payments for all of their loans and who hold lower debt to income levels. These same standards apply to student loans.
If you are applying for an FHA mortgage however, additional considerations apply. FHA mortgages require that a maximum of 1% of both your total balance and monthly payments be included when calculating an applicant’s debt-to-income ratio. This means that even if your loans are in deferment and you are not required to make monthly payments, 1% of the total amount owed will still be added to your monthly debt burden for the purposes of calculating debt-to-income. This can be reason enough to decline an applicant or qualify them for a considerably lower mortgage amount than they would have been able to obtain otherwise.
Refinancing Your Student Debt
If your student debt is holding you back from achieving your financial goals, refinancing may be a prudent option. Refinancing is the process of replacing your current loan with a secondary loan carrying new obligations. This is most commonly done to reduce interest payments, lower rates, or change the loan type from adjustable to a fixed rate.
Refinancing student loans can lead to savings of $15,000 or more and therefore, should be seriously considered when looking at your financial future. As this is a major financial decision, applicants should invest time in shopping around to find the best refinancing options for their situation. Aggregators like Nerd Wallet’s loan calculator, can help provide a clear overview of the entire refinancing landscape and provide a less biased view than the lenders themselves.
These products are often only available to those with good credit, but if you do qualify, refinancing can not only save you money but also help you optimize your financial future.
Student Loans and Your Financial Future
Investing in a university or secondary education is often a great decision. By using debt properly, you can purchase an excellent tool for your future: your education. However, it is critical to ensure that you understand how to use student debt to set your financial future up for success.
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