We have all read about the student loan debt bomb and the trillions of student loan debt nationwide. One of the important issues related to student loans is their impact on credit scores and the related ability or inability to obtain a mortgage or even reasonable car loans.
Ah, student loans, the “gift” that keeps on giving!!
Can’t get through school without them; can’t pay them off in a reasonable time.
Student loans are treated as regular debt when it comes to income to debt ratios. So, if you have large unpaid student loans the likelihood of your qualifying for a mortgage is significantly reduced if not eliminated altogether. According to Kevin Goldman, President of Kaye Financial Corporation, in Bloomfield Hills, a mortgage brokerage firm, here are a just a few of the problems:
- Potential borrowers don’t qualify because they pay monthly student loan payments that are so high or, in some cases, even higher than their prospective house payment.
- If they have gotten behind on their student loan payments, many don’t realize that they are already in collections and they have terrible credit because of that.
- They don’t realize that just because the loans are in “payment deferred” we still have to use the upcoming payment amount in their debt to income ratio because they will eventually start paying it and this lowers their buying power on a house.
So, what can you do? Try not to let your student loans go into default. If you do, they may be reported to the Credit Reporting Bureaus and your credit score will plummet. Once you have defaulted, a defaulted or late payment may stay on your credit report for years.
If you haven’t already attempted to consolidate your loans and/or arrange for alternative payment plans with the student loan lenders, it may be too late to do so.
Can you file bankruptcy? Yes, but remember, Chapter 7 will not discharge your debts without an adversary proceeding to attempt to discharge them. This is an area of the law that is changing and you may be able to prove that you are unable to repay your student loans or that they are an extreme hardship.
Chapter 13 bankruptcy allows you to treat the student loans in conjunction with your other unsecured debt. Chapter 13 provides up to five years of “protection” from your student loans and may allow you to significantly reduce or even eliminate payments for that period of time. But, without an adversary proceeding to discharge the student loans, it can only abate the payments, not eliminate them. And, interest will continue.
Best idea: Contact an attorney who understands the changing relationship of student loans and bankruptcy to determine if and how you may be helped.
You have to be proactive, if you want to get your finances in order and pave the way for you to become a home owner in the future.