Should You Use a Mortgage to Refinance Student Loans?

Fannie Mae, the largest backer of mortgage credit in America, recently made it a little easier for homeowners to refinance their student loans. In an update to its Selling Guide, the mortgage giant introduced a student loan cash-out refinance feature, permitting originators that sell loans to Fannie Mae to offer a new refinance option for paying off one or more student loans.

That means you could potentially use a mortgage refi to consolidate your student loan debt. Student loan mortgage refis are relatively new. Fannie Mae and SoFi, an alternative lender that offers both student loans and mortgages, announced a pilot program for cash-out refinancing of student loans in November 2016. This new program is an expansion of that option, which was previously available only to SoFi customers.

Amy Jurek, a Realtor at RE/MAX Advantage Plus in Minneapolis/St. Paul, Minn., says people with home equity have always had a cash-out option, but it typically came with extra fees and higher interest rates. Jurek says the new program eliminates the extra fees and allows borrowers to refinance at lower mortgage interest rates. The policy change could allow homeowners to save a significant amount of money because interest rates on mortgages are typically much lower than those for student loans, especially private student loans and PLUS loans.

But is it a good idea?

Your student debt isn’t eliminated; it’s added to your mortgage loan.

This may be stating the obvious, but swapping mortgage debt for student loan debt doesn’t reduce your debt; it just trades one form of debt (student loan) for another (mortgage).

Brian Benham, president of Benham Advisory Group in Indianapolis, Ind., says refinancing student loans with a mortgage could be more appealing to borrowers with private student loans rather than federal student loans.

Although mortgage rates are on the rise, they are still at near-historic lows, hovering around 4%. Federal student loans are near the same levels. But private student loans can range anywhere from 3.9% up to near 13%. “If you’re at the upper end of the spectrum, refinancing may help you lower your rate and your monthly payments,” Benham says.

So, the first thing anyone considering using a mortgage to refinance student loans should consider is whether you will, in fact, get a lower interest rate. Even with a lower rate, it’s wise to consider whether you’ll save money over the long term. You may pay a lower rate but over a longer term. The standard student loan repayment plan is 10 years, and most mortgages are 30-year loans. Refinancing could save you money today, but result in more interest paid over time, so keep the big picture in mind.

You need to actually have equity in your home.

To be eligible for the cash-out refinance option, you must have a loan-to-value ratio of no more than 80%, and the cash-out must entirely pay off one or more of your student loans. That means you’ve got to have enough equity in your home to cover your entire student loan balance and still leave 20% of your home’s value that isn’t being borrowed against. That can be tough for newer homeowners who haven’t owned the home long enough to build up substantial equity.

To illustrate, say your home is valued at $100,000, your current mortgage balance is $60,000, and you have one student loan with a balance of $20,000. When you refinance your existing mortgage and student loan, the new loan amount would be $80,000. That scenario meets the 80% loan-to-value ratio, but if your existing mortgage or student loan balances were higher, you would not be eligible.

You’ll lose certain options.

Depending on the type of student loan you have, you could end up losing valuable benefits if you refinance student loans with a mortgage.

Income-driven repayment options

Federal student loan borrowers may be eligible for income-driven repayment plans that can help keep loan payments affordable with payment caps based on income and family size. Income-based repayment plans also forgive remaining debt, if any, after 25 years of qualifying payments. These programs can help borrowers avoid default – and preserve their credit – during periods of unemployment or other financial hardships.

Student loan forgiveness

In certain situations, employees in public service jobs can have their student loans forgiven. A percentage of the student loan is forgiven or discharged for each year of service completed, depending on the type of work performed. Private student loans don’t offer forgiveness, but if you have federal student loans and work as a teacher or in public service, including a military, nonprofit, or government job, you may be eligible for a variety of government programs that are not available when your student loan has been refinanced with a mortgage.

Economic hardship deferments and forbearances

Some federal student loan borrowers may be eligible for deferment or forbearance, allowing them to temporarily stop making student loan payments or temporarily reduce the amount they must pay. These programs can help avoid loan default in the event of job loss or other financial hardships and during service in the Peace Corps or military.

Borrowers may also be eligible for deferment if they decide to go back to school. Enrollment in a college or career school could qualify a student loan for deferment. Some mortgage lenders have loss mitigation programs to assist you if you experience a temporary reduction in income or other financial hardship, but eligibility varies by lender and is typically not available for homeowners returning to school.

You could lose out on tax benefits.

Traditional wisdom favors mortgage debt over other kinds of debt because mortgage debt is tax deductible. But to take advantage of that mortgage interest deduction on your taxes, you must itemize. In today’s low-interest rate environment, most taxpayers receive greater benefits from the standard deduction. As a reminder, taxpayers can choose to itemize deductions or take the standard deduction. According to the Tax Foundation, 68.5% of households choose to take the standard deduction, which means they receive no tax benefit from paying mortgage interest.

On the other hand, the student loan interest deduction allows taxpayers to deduct up to $2,500 in interest on federal and private student loans. Because it’s an “above-the-line” deduction, you can claim it even if you don’t itemize. It also reduces your Adjusted Gross Income (AGI), which could expand the availability of other tax benefits.

You could lose your home.

Unlike student debt, a mortgage is secured by collateral: your home. If you default on the mortgage, your lender ultimately has the right to foreclose on your home. Defaulting on student loans may ruin your credit, but at least you won’t lose the roof over your head.

Refinancing student loans with a mortgage could be an attractive option for homeowners with a stable career and secure income, but anyone with financial concerns should be careful about putting their home at risk. “Your home is a valuable asset,” Benham says, “so be sure to factor that in before cashing it out.” Cashing out your home equity puts you at risk of carrying a mortgage into retirement. If you do take this option, set up a plan and a budget so you can pay off your mortgage before you retire.

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How Does Student Loan Deferment or Forbearance Affect Your Credit Score?

LendKey Student Loan Refinance Review

According to the latest annual report from the Institute for College Access and Success, 2015 college graduates showed a 4% increase in student loan debt over 2014 graduates. Among 2015 seniors, 68% who graduated had student loan debt, with the average balance being $30,100 per borrower.

With more college students graduating with student loan debt and balances continually increasing, it’s no wonder many are seeking deferment or forbearance. But if you are considering these options, there are some things you need to know first, including how it might affect your credit score.

What Is Deferment?

Student loan deferment is a period of time when the repayment of your loan’s principal and interest is temporarily delayed.

Unlike forbearance, when your student loan is in deferment, you do not need to make payments. And in some cases, the federal government may even pay the interest portion of your student loan payment. In order to qualify, you must have a federal Perkins Loan, a Direct Subsidized Loan, or a Subsidized Federal Stafford Loan.

Interest on your unsubsidized student loans or any PLUS loans will not be paid by the federal government. You will be responsible for interest accrued during deferment (if it’s not paid by the federal government), but you don’t have to make payments during the deferment period. If you’re not paying interest during deferment, it’s important to know interest may still be added to your principal balance. This may result in higher future payments.

There are several situations in which you may be eligible for student loan deferment:

  • If you are enrolled in college or career school at least half-time
  • If you are in an approved graduate fellowship program
  • During a period where you have qualified for Perkins Loan discharge or cancellation
  • During a period of unemployment
  • During a time of economic hardship (including Peace Corps)
  • During active military duty
  • During the 13 months following active military duty

Most deferments are not automatic, and you will need to submit a request for deferment to your student loan provider. If you are still in school at least part-time, you can apply through your school’s financial aid office.

What Is Forbearance?

If you are unable to make your student loan payments and don’t qualify for deferment, your loan officer may allow forbearance. When your student loans are in forbearance, you may be able to make smaller payments or skip payments altogether for up to 12 months.

However, before you apply for forbearance, keep in mind that interest will continue to accrue on all types of loans. This means your balance will grow, increasing the amount of time and money it will take to pay off your student loans. You can choose to pay the interest-only portion during forbearance. If you choose not to, the interest may be capitalized and added to the principal balance of your loan.

According to the Federal Student Aid office at the U.S. Department of Education, there are two types of forbearance, discretionary forbearance and mandatory forbearance.

Discretionary forbearance is when you, the borrower, request forbearance from your lender due to financial hardship reasons or illness. Ultimately, the lender decides whether or not to grant your discretionary forbearance request.

With mandatory forbearance, your lender is required to grant you forbearance on your student loans if you request it. However, you must meet the following criteria:

  • You are completing a medical or dental internship or residency program, and meet specific requirements.
  • The total you owe each month for all the student loans is 20% or more of your total monthly gross income.
  • You are serving in a national service position and received a national service award.
  • You are a teacher and qualify for teacher loan forgiveness.
  • You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
  • You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.
  • Similar to deferment, forbearance doesn’t happen automatically. You must apply for forbearance and may be required to show proof of these situations in order to be granted forbearance.

What Happens to Your Credit Score When Your Student Loans Are in Deferment or Forbearance?

As long as you continue making your student loan payments on time and in full until your request for deferment or forbearance is approved, your credit score should not be affected.

According to Rod Griffin, Director of Public Education at Experian, “When a student loan is in forbearance it is not in a repayment status. As a result, the late payments would not be reported. If it is reflected as current and not in repayment, it likely would not have a negative effect on credit scores.”

What Happens if You Default on Your Student Loans?

If you miss a payment between the time you apply for and are approved for deferment or forbearance, you will be considered to be in default on your student loans, and your credit score could be negatively impacted by this missed or late payment.

“Defaulting on a student loan is no different than defaulting on any other installment loan. Failing to pay as agreed will severely damage your credit history and, therefore, your credit scores,” Griffin said.

Being 60 days late or more on a student loan or credit card payment could damage your credit score as much as 100 points.

The Bottom Line

If you are unable to afford your student loan payments, deferment or forbearance may be options to consider. However, it’s important to remember that your student loans will continue to accrue interest, which could result in your paying more over the long run. Between the time of application and the time you are approved for deferment or forbearance, you must continue to make your student loan payments in full and on time in order to avoid potential damage to your credit score.

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How This California Couple Paid Off $100,000 of Debt in 2 Years

Illustration by Kelsey Wroten
Illustration by Kelsey Wroten

When 31-year-old Priscilla Jones completed her MFA in film in 2011, she was left with a total of $96,000 of student loan debt from both her undergraduate and graduate studies. (She requested that we change her name for privacy reasons). Over the next three years, thanks to compounding interest charges, the original amount ballooned to $118,000. On her current payment plan, it would take another 15 years to pay off all her debt.

Rather than dragging the process out, she and her husband (we’ll call him Nathan), decided to aggressively pay down her debt. Over the next 22 months, they paid off $100,000 of the original loan balance — all while raising a young child in Los Angeles.

Here’s how they did it:

Making a pact

While Nathan, 41, was fully aware of Priscilla’s debt load when they got married in 2011, it wasn’t until 2014 — on Valentine’s Day, to be exact — when the couple opened the hood on Priscilla’s student loans to uncover what was lurking underneath.

“For the first few years of our marriage, we just couldn’t afford to buckle down to pay them off, so we didn’t really take a close look,” says Nathan.

The catalyst for examining Priscilla’s loans? In less than two months, one of the largest loans Priscilla carried — a total of $88,000 — would come out of forbearance. The additional loan payment would triple their monthly bill from $300 to $900. Two weeks later, they decided to dump their savings accounts, putting $24,000 toward her largest debt.

And then they made a pact: They would do everything they could to pay off the loans within three years.

Working overtime

On top of working a full-time job in operations at a tech startup, Priscilla took side jobs, working an additional 20 to 30 hours a week. She kept $600 a month from her salary for personal spending and used the rest to pay off her student loans. She and Nathan made sure to keep $5,000 to $10,000 in an emergency fund at all times.

Bonuses and promotions

They lived off of Nathan’s salary in management at a tech startup, and Nathan’s work bonuses went straight toward paying off the debt. When Nathan started his current job in 2012, he earned $53,000, including bonuses. His company soon saw tremendous growth. As a result, Nathan quickly ascended the ranks, and his income spiked dramatically. The couple’s combined salary in 2014 was $170k and $160k in 2015, and every penny they could pinch went toward their debt load.

“We think of ourselves as being very fortunate,” says Nathan. “But even if my income hadn’t grown as it did, we would’ve used the same mindset and tactics to pay off our loans. Instead of it taking three years, it would’ve taken 10.”

Never ‘act your wage’

Although they were in a high income bracket, no one would have guessed as much by looking at their spending habits. They lived as frugally as possible to focus on paying off the student loans. They stayed in the two-bedroom, two-bathroom apartment in Venice that Nathan had locked down at a low rate during the recession. They drove two beat-up cars that were paid off in full and had good gas mileage.

“We really had to examine our needs versus wants,” says Priscilla. While they’ve never been big spenders, and value community and experiences, they had to put some of their wants on hold. For instance, Nathan, who loves to invest, contributed just the minimum toward his employer’s 401(k) to qualify for the full matching contribution. Priscilla curbed any frivolous spending on clothes. They also put off getting new carpet and furniture, both of which needed desperately to be replaced.

They shopped at the Dollar Store, didn’t buy clothes that required dry cleaning, and refrained from traveling for pleasure. They paid as many bills as they could on their credit cards, which were paid in full each month. Any reward points they racked up went toward gift cards for restaurants and movies. A rare dinner out would be at El Pollo Loco or In-N-Out Burger.

“We turned it into a game, and had fun with it,” explains Priscilla. For instance, the couple placed a chalkboard in their kitchen and wrote on it the outstanding debt amounts and interest rates, along with specific dates for hitting their goals.

The ‘avalanche’ method

To prioritize which debts would be paid off first, they decided to use the ‘debt avalanche’ method. They aggressively knocked off the loan with the highest interest rate first, then worked their way down. They would challenge each other to save as much as they could toward paying off the loan. “Working together to pay off debt helped us bond,” adds Nathan.

“To stay motivated, we would obsessively calculate how much interest we were paying each day,” says Priscilla. “At one point we were paying $37 a day in interest alone.”

Taking time to celebrate

When they reached a debt payoff total of $100,000 in February 2015, they decided to ease up on their loan repayments. To celebrate, they rented a limo and had a night out on the town. They also finally were able to give their apartment a facelift. “We no longer have to move furniture around to hide the holes in the carpet anymore,” Priscilla says.

In September of this year, the couple made their final loan repayment and are completely debt- free.

They say that it’s essential to maintain perspective when paying off student debt.
“Remember, you’re not dying,” Nathan says. “Just focus on paying it off, and your debt will get crushed.”

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Debt-Ridden ITT Tech Students Grapple with Uncertain Futures

Kevin Jackson, age 34, graduated from ITT Tech's Newtown, Va., campus in 2007. He is paying off $40,000 in private and federal student loan debt.
Kevin Jackson, age 34, graduated from ITT Tech’s Newtown, Va., campus in 2007. He is paying off $40,000 in private and federal student loan debt.

The news that for-profit university chain ITT Tech would shutter 137 campuses across the country this week amidst a federal investigation into predatory lending, recruiting practices left thousands of students’ futures uncertain. They have big choices to make and, in many cases, few options.

Roughly 35,000 of the school’s 45,000 students are eligible to have their federal student loans discharged, which could total as much as a half billion dollars alone, according to the Department of Education. But if students decide to continue their education at a different school, they may disqualify themselves from loan forgiveness altogether.

“We may be underestimating the potential impact of this and students filing for forgiveness of loans,” said Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, a college and scholarship comparison site. “This isn’t the last we’ll see of this situation.”

Students who were still enrolled when the campuses closed — or withdrew in the last 120 days — can apply for a federal loan discharge. Those who graduated or withdrew several months ago or have private student loans, however, are likely still on the hook for their debt. Their only recourse is to file a borrower’s defense claim, a difficult process that would require them to prove they were defrauded by ITT Tech in some way.

“In a properly regulated environment, we don’t have 45,000 students left holding the bag and 8,000 staff members becoming unemployed,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities. “If there’s any silver lining, it’s that this operation won’t be able to pull in any new victims.”

ITT Tech officials were unavailable for comment; however, the company pushed back against regulators’ allegations in a statement this week.

“We had no intention prior to the receipt of the most recent sanctions of closing down despite the challenging regulatory environment that now threatens all proprietary higher education,” the statement says.

MagnifyMoney reached out to ITT Tech students to find out how they are moving forward in the wake of the school closure.

ITT Tech Tyler

Unmet expectations

Like many people who enroll at for-profit universities, for Kevin Jackson, age 34, it all started with a commercial.

When Jackson, who studied computing at ITT Tech’s Newtown, Va., campus between 2003 and 2007, saw the iconic ITT Tech commercial, the timing was perfect. He was looking for a nontraditional college experience and a program that would prime students for jobs in their field. The first three semesters went smoothly. The administrators seemed to care, and teachers even called to check on him when he had the flu and missed class.

By the fourth semester, however, he noticed teachers were leaving, and eventually the campus dean departed. New teachers didn’t seem to know the class material, he said. One particularly troubling incident occurred in 2003, halfway through his program. He was called to the financial aid office and thought his paperwork was incomplete. Instead, the financial aid counselor asked him to cosign a student loan for someone in his class. He balked.

Tyler McCormick, age 34, graduated from ITT Tech’s Bessemer, Ala., campus in June 2015. He’s considering filing bankruptcy to relieve part of his $70,000 in federal and private student debt.

“I knew I would have problems paying my own loans, and I wasn’t going to put his education in my hands,” Jackson said. “They spent 45 minutes trying to twist my arm but finally dropped it and asked another student. When I said ‘no,’ that’s when they began to treat me differently.”

Jackson enrolled with ambitions of working in IT support. He graduated with $40,000 worth of federal and private student loans and no offers of employment. In job interviews, employers would question his decision to attend ITT Tech, he said. He took administrative jobs over the next decade until he finally landed a job in 2014 with Xerox. He processes applications for new Medicaid enrollees.

“[The loans] are constantly weighing on me now,” he said. “They’ll allow you to pile forbearance on top of forbearance, but that interest builds up.”

Tyler McCormick, age 34, graduated from ITT Tech’s Bessemer, Ala., campus in June 2015. He’s considering filing bankruptcy to relieve part of his $70,000 in federal and private student debt.

About 100 miles away in Norfolk, 31-year-old Michael Ragsdale says he has little to show for the $20,000 in student loans that piled up during his years at ITT Tech.

Ragsdale enrolled in ITT Tech in 2005 when he attended a recruitment fair at a mall near campus. What drew him in was a sign that offered a free laptop. His computer had recently died, and he couldn’t afford a new one. He signed up to visit the campus that day.

“[The laptop] wasn’t free, of course. That cost is rolled into your student loans,” he said. “They suckered me in then, and it’s tough to relive it all now.”

Ragsdale, who uses a wheelchair, applied for the game design program but was put into network design classes, which he stuck with at the time. After a year, Ragsdale withdrew from the program and decided to attend a local community college. He later transferred to a four-year college. He now works for the college’s Residence Hall Association.

Professionally, he tries to pretend like ITT Tech never happened. “Like many ITT students, I now only put my community college and four-year college on my resume,” he said. “I don’t work in my field of study, but I’m happy where I am.”

Ragsdale hopes to help others like him find a good career despite ITT Tech.

“You can turn your life around,” he said. “The world doesn’t end with the collapse of ITT.”

ITT Tech Brandon

Waiting for answers

Brandon VanVorst, age 30, signed up for computer networking classes at ITT Tech’s Albany, N.Y., campus in 2009 because it offered him the option to continue working his full-time job in the restaurant industry and take both day and night classes. For the first few semesters, the arrangement worked. His employers knew he was taking classes, and his guidance counselors helped him find the best classes to fit his schedule.

After six months, however, staffing dropped, and the campus cut back on class offerings. The available classes didn’t fit VanVorst’s work schedule, but the guidance counselor signed him up anyway. To continue qualifying for federal financial aid, he had to take at least three classes. He failed several due to poor attendance, racking up $40,000 in student loan debt in the process.

Kandi Canales, age 46, was halfway through a two-year nursing program at ITT Tech's Norfolk, Va., campus when the school announced it was closing for good.
Kandi Canales, age 46, was halfway through a two-year nursing program at ITT Tech’s Norfolk, Va., campus when the school announced it was closing for good.

“They would sign me up for classes that I couldn’t take and wouldn’t work with me on flexibility,” he said. “The selling point of ITT is that adults can better their careers, but in reality, it doesn’t work for those who have real jobs.”

VanVorst put his federal loans in forbearance two months ago and filed a defense to repayment application in hopes that he can receive loan forgiveness. He’d like to be reimbursed for the classes that he couldn’t attend based on the scheduling, which shows up on his transcript as failures due to attendance.

“I do have a job in the IT world, and I’ve climbed the company chain because of my work ethic,” he said. “So many people have said they believe their degree is worthless, but to me, the person holding the piece of paper makes it worth it.”

Tyler McCormick, age 34, graduated from ITT Tech’s Bessemer, Ala., campus in June 2015. His $70,000 in federal and private student loans were in deferment through the end of August. Just days before ITT Tech announced its closing, McCormick received a bill for the entire amount of his loan. Now he’s seeing loan consolidation ads online for ITT Tech students.

“The vultures are trying to swoop in and take advantage of students,” he said. “I’m trying to take a breath and pause for a second.”

McCormick is contacting lawyers in his area for professional advice before making decisions and considering Chapter 7 bankruptcy as an option. He’s heard through several ITT Tech student groups on social media that lawyers have been reluctant to take cases because everything is still up in the air.

“I learned about computers, not bankruptcy,” he said. “I think we all need to step back and see what professional student loan experts say.”

ITT Tech Kandi

Finding a way forward

Kandi Canales, age 46, was shocked when she opened her email to find news about ITT Tech’s closing last Tuesday. Canales completed her first year in the nursing program at the Norfolk, Va., campus and planned to start the next quarter on Sept. 12. Instead, she no longer had a school to attend.

“I got sick to my stomach because I’ve worked very hard to get where I am,” she said. “I started crying and even threw up. It took me back to how I felt in 2011 when my 20-year marriage ended.”

She heard rumors about trouble at ITT Tech but hadn’t paid much attention to the media coverage. It was her psychology instructor who told her about the new student ban in late August.

“None of us thought anything about it, just that we wouldn’t have new students coming to the school,” she said. “But on Tuesday morning at 8 a.m., an email went out that ITT closed, effective immediately. That’s the only notice we received.”

Canales is one of many nursing students across the country struggling to figure out the next step. In the ITT Tech Warriors group on Facebook, several students are turning to their state nursing boards for permission to complete programs at other schools or sit for licensing exams. Canales scheduled an appointment to visit her local community college on Friday, take a placement exam, apply for new financial aid, and start again next semester.

“At my age, there is no option to sit back and say, ‘Woe is me.’ I have to keep moving forward,” Canales said. “I have to start from scratch all over again, but I’m going to get this degree.”

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Credit Expert Confession: I’m Afraid of Retirement

retirement

I’m not easily rattled. When it comes to fear, I’m not shaken by spiders, horror movies or even unknown sounds on a dark city street. As a 30-something journalist, wife and mother, my greatest fear boils down to one word: retirement.

I’m not alone in my trepidation. A Transamerica Center for Retirement Studies survey revealed that 41% of Americans are doubtful about their ability to retire. For younger generations, the goal is more difficult than ever thanks to a new set of challenges.

Life Expectancy

According to the Center for Disease Control and Prevention, the current life expectancy for Americans is 78.8 years. Although living longer can be a comforting thought, it’s also financially complicated. A retiree who leaves the workforce at 65 reportedly needs approximately 80% of their final income to account for every year of retirement. Assuming you earn $100,000 per year, your savings should be — at minimum — $1.2 million. That certainly isn’t a subtle amount.

The Uncertainty of Social Security

While it’s likely that Social Security will exist in the decades ahead, don’t expect the payout to support your old age. A 32 year old earning $100,000 per year will only qualify for $1,830 in monthly benefits by the age of retirement, according to the Social Security Administration’s quick calculation tool. Unfortunately, this meager sum isn’t enough to sustain the average post-employment lifestyle.

Student Debt

My college days are long behind me, but the student loans that helped me fund my education are still very present in my life. Setting aside monthly funds for education debt can mean sacrificing retirement savings.

The Future for Children

Independence isn’t a given in today’s world. In fact, 32.1% of adults ages 18 to 34 live at home with their parents, according to a Pew Research study. The challenges of unemployment, a high cost of living and student loan debt have forced this generation back into the nest — whether they like it or not. Will circumstances change as my child ages, or can I look forward to a 30-year-old sleeping in my basement? I don’t know, but I worry about the answer and its impact on my retirement income.

3 Ways to Help You Address These Concerns

These concerns are common for people in every age group, and it begs the question, What is the solution? These risks aren’t likely to go away as time passes, but there are a few ways to minimize the consequences.

1. Save as Much as Possible

Time is a valuable asset when saving for retirement, and it’s never too soon to invest.

  • Pay Off Debt Sooner: Losing money to interest fees means you’ll have less to invest for the future. Talk to a financial planner about the best way to tackle debt and prioritize savings. A healthy balance is essential.
  • Max Out Your Retirement Contributions: Many companies match a percentage of their employees’ 401K contributions. Check with your employer and see if this is the case, and then take advantage of this as soon as you can. It’s a good idea to max out your matching contributions and consider upping your monthly investment as well. For example, suppose you currently set aside 10% of your income for retirement. Would a budget overhaul allow you to increase your savings to 15%? Think carefully about your daily spending choices and how they will impact your future.
  • Consider Tax Implications: Investment vehicles come in many forms, and taxation could save or cost you thousands of dollars. Strategize with your financial planner to determine the best way to invest.

2. Live Within (or Below) Your Means

The housing crash of 2008 taught us a valuable lesson about the dangers of overspending. It’s easy to risk your financial safety by splurging too often or borrowing too much. In reality, I feel it’s wise to keep 15% of your income in liquid savings and another 15% or more for retirement. Do you have the ability to funnel 30% of your income into savings? If not, perhaps it’s time to rethink your budget.

3. Focus on Credit Health

Retirement is one of many factors that benefits from credit health. A high score allows you to save money on variable and fixed interest rates, insurance premiums and even qualifies you for better employment. (You can see how your habits are affecting your credit by viewing two of your credit scores for free, updated each month, on Credit.com.)  

None of us can predict the challenges we’ll face as retirement nears. Although my doubts and fears are likely to rage well into my 60s, I’ve found that saving for those final years is the best way to prepare.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Ridofranz

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6 Student Loan Mistakes to Avoid at All Costs

avoid_student_loan_mistakes

Every time I read the news, I hear how America’s problems with student loan debt have gotten worse.

For example, I learned recently that collective student loan debt surged to over $1.4 trillion nationally. And in an article in the Wall Street Journal, I learned that more than 7 million student borrowers were at least one year behind on their payments.

Also, average student loan debt is up to over $37,000 this year, leaving many young adults questioning their future prospects. With so much debt at a young age, more young people are putting off marriage and parenthood than ever before.

So, what should people do?

No matter where you are with your loans, you can make your situation better (or worse) depending on what you do from here on out.

To learn about some of the mistakes students, borrowers and even co-signers should avoid, I reached out to several financial planners who have experience in this space. When it comes to student loans, they say to avoid these six mistakes at all costs.

1. Choosing a Four-Year School Without Researching Other Options

According to wealth adviser Joseph Carbone of Focus Planning Group in Bayport, New York, too many young people assume they need a four-year degree without thinking it through. And once they get into their four-year degree program, they start racking up more debt than they need. A lot of times, at least some of these students would be better off pursuing a two-year program first.

As Carbone notes, this is especially true in the state of New York, where kids can attend a two-year SUNY program at a considerable discount.

“If you start with a good SUNY two-year program, and then transfer to the school of your choice, you could save tens of thousands of dollars,” he says.

If you already graduated, this tip can’t help you now. But if you’re gearing up for school, it can pay to explore some of the degree options two-year schools offer. A lot of times, you can begin lucrative careers with a two-year degree or even an apprenticeship.

“Parents and students have to accept the idea [that] there is a flood of college graduates with limited job prospects,” says financial planner Tom Diem of Diem Wealth Management. Meanwhile, there are also many unfilled, high paying jobs in technical fields.

Because of this, says Diem, you need to think about long-term value when choosing a program.

And remember, like Carbone says, you can always start with a two-year degree, then transition to a four-year program later.

2. Living Off Your Student Loans

Depending on the student loans you choose, you may be able to borrow more than the cost of your tuition and books. When that’s the case, it’s tempting to spend the “overage” on a lifestyle you couldn’t afford otherwise.

But, just because you can use student loans for a Spring Break trip to Mexico doesn’t mean you should. Remember, you have to pay back every cent you borrow – plus interest.

Kansas City financial planner Clint Haynes says he has seen this situation play out time and again, with disastrous results.

“Student loans should only be used [for] education expenses, not going out to the bar with your friends,” says Haynes.

Yes, you may need to get a part-time job or be more frugal with the money you saved from your summer job. However, you will be so grateful you did after you graduate and start paying your bills.

“The goal is to get your degree with as little debt as possible,” he says.

Once you graduate and start earning a real income, then you can go to Cancun.

3. Dismiss Working During School

Sure, you can borrow enough to cover your tuition and your living expenses, but should you? According to financial planner Josh Brein of Brein Wealth Management in Bellevue, Washington, you can make your life easier by working during school and borrowing less.

“I’m a huge advocate of working while you’re learning, because it teaches us that money doesn’t grow on trees,” says Brein. Plus, you can use some of your earnings to pay for school along the way. You don’t have to prepay all of your tuition, of course, but any amount you can pay will help.

4. Co-Signing Without Understanding the Potential Consequences

This tip is for parents and guardians that might co-sign on a student loan. A CBS News Money Watch article from August 2014 stated that nearly 156,000 older Americans saw their Social Security checks dinged the previous year for delinquent student loan payments.

Because student loan delinquencies are on the rise, you should think long and hard before attaching your name to a brand new loan.

“Parents and grandparents co-sign with the best of intentions but often without thinking about the financial ramifications if the student doesn’t pay,” says Charles C. Scott, a financial adviser in Scottsdale, Arizona. “Be aware and be careful,” he says. If the person you co-signed for quits paying, you’ll be on the hook.

5. Refinancing Without Running the Numbers

Oftentimes, new graduates assume refinancing is a good deal without ever running the numbers or considering what they’ll lose.

“Don’t make this mistake,” says Portland, Oregon-based financial planner Grant Bledsoe. “Private lenders do offer competitive rates when refinancing, but by leaving the federal system, you forfeit many of the associated benefits.”

Any time you refinance a federal student loan with a private lender, you miss out on certain protections like income-driven repayment plans, deferment and forbearance. So even if you get a lower interest rate by refinancing, you’re barring yourself from choosing these options down the line.

Refinancing is the best option in some circumstances, but be wary of what you’re giving up,” says Bledsoe.

6. Paying Off Student Loans Instead of Other High-Interest Debts

While it’s reasonable to see your student loan debt as an emergency, paying off other debts first — while making your minimum monthly student loan payments — might leave you better off.

“If you have other loans with high interest rates, make sure to prioritize those for repayment first,” says financial advisor Billy Xiao of Mobius Wealth, in Vancouver.

If you have high interest credit card debt or personal loans, for example, you can easily save more on interest by making extra payments on those first. And since you might be able to deduct the interest you pay on student loans on your taxes, there are additional financial considerations to ponder as well.

To reiterate, that does not, of course, mean skipping student loan repayments so you can make the other payments with higher interest rates. Skipping repayments and possibly going into default can have very serious consequences for your credit scores. (You can see where your credit currently stands by viewing two of your credit scores, updated each month, for free on Credit.com.) The bottom line: Make sure to take a holistic look at your finances before paying extra toward your student loans. Sometimes, other debts should take precedence.

While a college degree can certainly pay off, borrowing unlimited amounts of money can make your post-college life harder than it has to be. Before you sign on that dotted line, make sure you know exactly what you’re getting into. With a few smart moves and some self-restraint, you can borrow less, pay down debt faster and avoid many of the pitfalls that befall too many college graduates with debt.

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The FAFSA Is Changing This Year: Here’s Everything You Need to Know

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People starting college in the fall of 2017 probably haven’t yet decided where they’re going to school, let alone figured out how much money they’ll need to do it, but it’s almost time to start applying for financial aid. In the past, students and their families could turn in the Free Application for Federal Student Aid (FAFSA) starting Jan. 1 of the year they’ll need the aid, but that date has been moved up.

It’s coming up quickly, too. For the 2017-18 academic year, people can turn in the FAFSA as early as Oct. 1, 2016. That’s in less than 3 months.

Why So Early?

Before we get into the specifics of this change, it’s important to point out why you’d want to turn in the FAFSA so early. Figuring out how you’re paying for college is one of those “the sooner, the better” kind of things. Though the application has “federal” in the name, states and schools also use the FAFSA to dole out financial aid, and every state and school has different ways of doing that. Some distribute aid on a first-come, first-served basis, so the longer you wait to turn in your FAFSA, the lower your chances of receiving assistance.

With that sort of pressure, you’d think college-bound people (or their parents) would greet the stroke of midnight with a toast of “Happy New Year! But first, FAFSA.” It doesn’t tend to happen that way, for a few reasons. First, a lot of people don’t realize how important it is in getting financial aid, or they assume they won’t qualify for aid, so they don’t bother with the paperwork. (Insert “you won’t know if you never try” cliche here.) In addition to the common mistakes of not knowing deadlines or underestimating the importance of the FAFSA, people put it off because they think they won’t have all the information they need to complete it until after they’ve filed their taxes.

For example: The FAFSA for the 2016-17 school year required applicants to enter their income information from the 2015 tax year. The deadline for submitting your 2015 income tax return was April 18, 2016. At that point, the FAFSA deadline in many states had passed, or states had already awarded all available aid. How could an application that requires 2015 tax information come due before your 2015 taxes, you ask? You can estimate your financial information on the FAFSA, allowing you to turn in the application before you file your taxes, which is something a lot of people may not realize.

Yes, it’s confusing, which brings us to the new policies coming in a few months.

What Changed?

For the 2017-18 academic year, students and their families will use their financial information from the 2015 tax year to fill out the FAFSA. The idea is that this will make it easier to fill out the form earlier. It also allows more people to take advantage of the IRS Data Retrieval tool. It transfers your tax information to the FAFSA, but because many people have traditionally filled out the FAFSA before completing their taxes, that tool hasn’t been as helpful as it could be.

“This will simplify the FAFSA, cutting about a page of questions from the form,” Mark Kantrowitz, said in an email to Credit.com. Kantrowitz is a financial aid expert and publisher and vice president of strategy at Cappex, an online platform for researching colleges and scholarships. “Also, any data element that is transferred unmodified from the IRS will not be subject to verification … This is especially important for low-income students, who often have difficulty completing verification.”

What You Need to Know Before October

The Education Department recommends filling out the FAFSA online, but you can also fill out a PDF version (you submit that through the mail) or request a paper form be sent to you. You also need a federal student aid ID (FSA ID) to sign your FAFSA, and it can take up to 3 days after registering for your FSA ID before you can use it to sign your application.

You still don’t need to have filed your taxes in order to fill out the FAFSA (though it’s easier that way, with the IRS Data Retrieval tool), and you also don’t have to know where you’re going to school. You can list a college on your FAFSA, if you want them to receive your FAFSA, even if you haven’t yet decided if you’re applying there. Keep in mind you have to fill out the FAFSA every year you’re applying for aid, as well, so for people who have gone through this process before, now you can start it earlier.

“The switch to prior-prior year also increases the amount of time available to apply for financial aid, from 18 months to 21 months,” Kantrowitz said. He said he hoped the earlier availability of the form would lead to more low-income students filing their FAFSAs early, consequently allowing them to qualify for more state aid.

Changes to how people apply for federal student aid hardly solves the burden of rising education costs and the ever-growing student loan debt in the U.S., but they simplify a process that many people find intimidating.

Of course, paying for college goes beyond this single form. Figuring out how much you can afford to spend (and borrow) to get a degree can be really tricky, but it’s important that students and their families consider the future cost of these decisions. Student loans have a significant impact on borrowers’ credit scores (you can see just how much by reviewing two of your free credit scores each month on Credit.com), and falling behind on loan payments can seriously damage your financial stability. You can read more about options for paying for college or repaying student loan debt here.

More on Student Loans:

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Can Consolidating My Student Loans Help Me Buy a Home?

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While rising debt levels are partially responsible for a falling homeownership rate in the U.S., there are ways aspiring homeowners can responsibly take on a mortgage while working on paying down other loan balances. For example, a Credit.com reader recently asked us if there’s a way to get approved for a mortgage, despite having education debt.

“My Equifax report says 10 of my 14 direct service school loans are over the limit. I only started paying two months ago and am on time with full payment. Would consolidating those loans take this problem away? We are trying to buy a house and the lender said this is affecting my credit score.” — Stacy

If by “over the limit” you mean your current loan balances are higher than the amount you originally borrowed, that’s not surprising. Many student loans accrue interest before you enter repayment, and by the time your first bill comes due, the balance will likely exceed the original loan amount. Yes, credit scoring models generally ding you for having high loan balances relative to the original amount borrowed, but taking out a consolidation loan isn’t likely to help much in this area because you’ll have a high balance on that new loan. As for a loan balance affecting your credit score, the best thing you can do is pay it down.

That’s not to say student loan consolidation can’t help you get a home, because it can. Whether or not it’s the right move for you depends on your priorities. Heather McRae, a senior loan officer at Chicago Financial Services, said she encounters this question a lot, particularly when dealing with younger borrowers.

“In mortgage underwriting, one of the biggest factors is your debt-to-income ratio, and that’s specifically on a monthly basis,” McRae said. “If you have the ability to cut [your monthly payment] in half some way or cut it down in any regard, that will help you more easily qualify for a mortgage.”

Is This the Right Option for You?

Student loan consolidation can help you reduce your monthly student loan payments if you extend the loan-repayment term or get a lower interest rate on your loans. (Federal Direct consolidation loans average the interest rates of the loans being consolidated to determine the APR on the new loan, but you might be able to qualify for a lower APR by refinancing with a private lender. Keep in mind that consolidating federal loans with a private loan means you lose some of the repayment flexibility offered through the government.)

Say you have multiple student loans, and each of those loans has a 10-year repayment term, you could consolidate them into a 20-year repayment term and reduce your monthly student loan obligation. You may have more flexibility in your monthly budget, but a longer loan term usually means you’ll end up paying more in the end, unless you qualify for some sort of student loan forgiveness. Even then, you need to consider how much you may end up owing in taxes on forgiven debt.

Figuring out the most cost-effective option can be tricky, but if you’re focused on buying a home in the near future and know your student loans are an obstacle between you and that goal, consolidation may be a viable strategy.

It’s Important to Plan Ahead

One more thing: If you’re thinking of consolidating your student loans to improve your chances of getting a mortgage, give yourself plenty of time to do it.

“It’s not good to do any sort of applying for other loans in the middle of when you’re trying to get a loan,” McRae said. She recommended planning ahead and talking to a mortgage professional if you have questions about how you can improve your chances of getting a home loan. “I talk to people a year or more ahead of time.”

Remember that checking your credit is an important part of financial housekeeping before you apply for any loan, especially when it involves buying a home, because a good credit score can save you a lot of money by way of a good interest rate. You can keep tabs on where you stand by getting two free credit scores, updated every month, on Credit.com.

More on Mortgages & Homebuying:

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This Expensive Private College Turned Student Loan Debt Relief Into a Lottery & People Flipped Out

northeaster-university

Recent college graduates are facing the possibilities of what comes next — new job, more school, and, of course, student loans. While repaying those loans might be daunting, one Boston school decided to offer its former students a chance for some help, in exchange for donations.

Northeastern University reportedly sent out a text to a select group of alumni, saying they’d be entered for a chance to win $1,000 to put toward student loans — that is, if they gave back to their alma mater.

“Summer’s on us! Make a gift to NU and you could win $1K toward your student loan payments,” the text, which is making the rounds on social media, reads.

Undergraduate tuition at Northeastern University averages about $60,000 each year, according to their site. For the full four years, that’s about $240,000, not including room and board, books or other school-related expenses. While any help with repaying student loan debt would be a godsend, many people were not pleased with the campaign and took to social media to air their gripes.

Northeastern University said in an email to Credit.com that the campaign has already ended.

“Inspired by a well-intentioned donor, the university launched a one-time text message campaign to a limited group of alumni,” a spokesperson for the university wrote. “It was a one-day effort and has now concluded.”

Paying Back Student Loans

Though Northeastern’s message garnered negative attention, you may welcome the chance for some help in paying off your student loan debt. But instead of betting on a lotto, you may want to consider some of the student loan forgiveness plans outlined here.

Remember, missed student loan payments can impact your credit score. (To see how your student loan debt is affecting your credit, you can view your free credit report summary, updated each month, on Credit.com.) There are some options for people who are behind on federal student loan payments. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan, or you can go through the government’s default rehabilitation program. If you make nine consecutive on-time payments (and the payments can be extremely low), your account goes back into good standing, and the default is removed from your credit report.

More on Student Loans:

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