Helping homeowners refinance and pay down student debt
Outstanding student loan debt in the U.S. totals $1.3 trillion, according to the Federal Reserve Bank of New York. That’s the second-highest level of consumer debt —only behind mortgages.
Here are a few other numbers to consider:
- Nearly 70 percent of bachelor’s degree recipients are leaving school with debt, according to the White House. That could have major consequences for the economy.
- The class of 2015 graduated with $35,051 in student debt on average, according to Edvisors, a financial aid website. That’s the most in history.
- One in four student loan borrowers are either in delinquency or default on their school debt, says the Consumer Financial Protection Bureau.
At the Same Time
Homeownership rates are at their lowest level in at least 20 years. And Millennials are a part of the challenge. They have the lowest ownership rate of their age group in history.
Millennials are delaying life choices like marriage and parenthood. And those are the primary drivers of homeownership.
Young adults aren’t the only ones student loan debt is affecting. Older borrowers are at risk of defaulting on student loan debt and losing their retirement benefits. The Government Accountability Office reports that about 36,000 Americans lost a portion of their Social Security check in 2013 because of an unpaid federal student loan.
Fannie Mae understands the connection between student loan debt and the slow growth of the housing market.
We are helping homeowners with at least 20 percent home equity pay off high-interest-rate student debt. And we are helping them potentially refinance to a lower mortgage interest rate.
To provide this flexibility, last year we introduced our Student Loan Payoff Refi solution in partnership with Sofi. Now, we’re introducing updates to expand that program by helping our lenders provide these benefits to even more homeowners.
Effective with the April 25 Selling Guide release:
- Lenders can offer a cash-out refi for homeowners to use the equity in their home to pay off their student loans in full. This allows lenders to serve more households than before.
- With appropriate documentation, lenders can exclude debts others have paid in the past 12 months from the debt-to-income calculation. This includes credit cards and auto and student loans. Documentation from the borrower should include 12 months of canceled checks or bank statements showing the payments to the debt service provider.
- Lenders can now accept student debt payments appearing on a credit report. Historically, Fannie Mae’s student debt policy required lenders to use 1 percent of the loan balance — regardless of the actual payment.
Here’s How it Works
Homeowners who have student debt or have cosigned for it can refinance their mortgages at a lower rate than what’s typically available. They can then use the proceeds to pay off the balance of existing student debt. They must use the payout to pay off at least one student loan. And the payment must go directly to the student loan servicer.
The lender will pay down the student loan by disbursing the payment directly to the servicer of the student debt.
Typically, a cash-out refinance carries a higher rate. But with this program, Fannie Mae won’t apply additional fees. So the rates are really low – much lower than most rates on student debt.
Here’s What it Means
Parents and other family members who have cosigned on the loan will be able to pay off debt for their loved one and lift that burden earlier. Cosigners can benefit enormously from this new loan option. Nearly 90 percent of private student loans to undergraduates require a creditworthy cosigner, according to data from Sallie Mae.
These policy changes continue to support our efforts of providing access to credit to future homeowners who have student debt.
With interest rates still near historic lows, this refinancing option could help an estimated 8.5 million U.S. households pay down or completely pay off student debt obligations.
This is new ground. And we’ll be monitoring the program closely to keep it aligned with the needs of America’s homeowners.