In June of 2010, student loan debt made headlines when it surpassed credit card debt here in the U.S. Since then, outstanding student loan debt has surpassed the $1 trillion mark — making it the single largest form of household consumer debt outside of home loans.
There’s no question that student loan debt continues to be a growing concern — not only for students and graduates, but for parents, grandparents and policymakers alike.
With so much media attention on the state of student loan debt, public awareness of the issue has grown substantially. Despite this growing awareness, there are a few facts about student loans that may still surprise you — especially when it comes to their potential impact on your credit, and your ability to qualify for other types of loans in the future.
1. Co-Signers Can Suffer Too
Student loan debt isn’t only a problem facing current college students and recent graduates. These days, student loan debt spans all ages. According to the Federal Reserve Bank of New York, 6.8 million Americans aged 50 and older account for more than $149 billion in outstanding student loan debt. If that’s not surprising, consider that 2.2 million of those are age 60 and older. It is not clear how much of the debt is the result of their own student loans, and how much of it is co-signed loans for children and grandchildren — but the likelihood is that for some, it is both. The dangers of co-signing for a child or grandchild is that you’re just as responsible for the debt as the student.
Parents and grandparents want what’s best for their children/grandchildren, but it’s important to stop and think long and hard before cosigning on a student loan for them. If the student misses a payment or goes into default, the impact is just as damaging to both parties. And considering the increasing costs and the number of years it takes to pay back student loans, the risk can span ten years if not more. Struggling with student loan debt and the potential liability from a credit perspective is something that boomers and senior citizens are now facing at a critical point in their own lives — a time when retirement should be the priority.
If you’re considering whether to co-sign on a student loan, make sure you’ve exhausted all other strategies first — from scholarships, fellowships, work study, and a less expensive school.
2. Student Loans Could Keep You From Homeownership
Starting salaries for new college graduates has been another issue for students with student loan debt. A common mistake that many new college students make is assuming that their starting salary after graduation will more than cover the cost of any student loans they might need to cover education costs. The problem with this assumption is that starting salaries rarely exceed expectations.
According to the January 2013 Salary Survey from the National Association of Colleges and Employers, the average starting salary for 2012 graduates increased to $44,482, which is quite promising compared to the dismal numbers we’ve seen in the past few years. Despite the gradual improvement in salaries, monthly student loan payments may still end up taking a significant bite out of a recent graduate’s income.
What does this have to do with your credit and the chances of you qualifying for a mortgage loan? Depending on the amount of student loan debt you’re carrying, it could negatively impact your debt-to-income ratio. This may not sound like a big deal but if you plan to purchase a home at some point and you’re still carrying significant student loan payments, you may not be able to qualify for a mortgage loan.
To clarify, student loan debt doesn’t impact your credit scores in the way that credit card debt does. It’s an installment loan and as long as the debt is paid on time and in good standing, the amount of the loan won’t have a significant impact on your credit score. However, despite the belief that lenders rely solely on credit scores for lending decisions, they actually consider other factors, like your debt-to-income ratio and your ability to maintain and repay a loan.
In fact, a dear friend of mine had this very problem when he and his wife went to purchase their first home. His student loan debt knocked his debt-to-income ratio out of the qualifying range for the mortgage. In the end, they had to put their homebuying plans on hold until his income increases or he pays off his student loans — both of which could take several more years.
So if your student loans are preventing you from buying a home, consider budgeting for a more aggressive paydown plan. That might mean getting another job (or two), putting yourself on a stricter budget — or likely a combination of the two — and focus on paying it off.
3. Bankruptcy Is Almost Never an Option
To add fuel to the fire, delinquency rates on outstanding student loans continue to rise. But if you’re thinking bankruptcy might be a way out of student loan debt, think again. In 1977 Congress banned federal student loans from being discharged in bankruptcy, and with the bankruptcy reform in 2005 private student loans were added to the list.
The only way student loans can be legally discharged in bankruptcy is if the borrower is able to successfully prove “undue hardship.” But don’t let the undue hardship petition fool you. The restrictions and requirements for meeting undue hardship are extremely difficult to qualify for. Unlike other types of debts, student loan debt is one of the most difficult debts to prove undue hardship — and is nearly impossible to do so. Unless your situation is utterly hopeless, and there’s no future possibility that you would ever be able to make any small effort to repay the loan, it’s not going to happen.
Lawmakers are introducing measures for debt relief, but until those measures are passed and in effect, your alternative is to work with your lenders through their various repayment programs.