I fully recognize and respect the different views people have on student loans and the use of debt in general. But sometimes I read someone’s advice to those of you with student loans and it makes me cringe.
Advice, that in my opinion, is misguided and naïve (at best).
Marilyn Kennedy Melia wrote an article at bankrate.com that caught my attention. It provides some really bad advice about managing your student debt.
I’ll provide some quotes from that article then provide my perspective on why it makes no sense.
“It’s not the balance, it’s the monthly payment.
While grads may obsess about how much and how long they’ll pay for college, “I don’t believe lenders really give a hoot about your total balance,” says Paul Baumbach, financial planner in Newark, Del.
Lenders focus primarily on how much income goes toward debt payments, says Charles Chedester, president of the Iowa Association of Mortgage Brokers.”
So a financial planner says “Lenders don’t give a hoot about your total balance”
What? So if you have $1,000 of student loans that’s the same as $150,000?
Then the president of an association of mortgage bankers says home lenders only look at your monthly payments. Even if your monthly student loan payments go on for 15, 20, 30 years or more?
How much debt you have makes a huge difference in the quality of your financial life. Staying in debt forever is a terrible plan. Don’t focus on how low you can make your student loan payment. That only keeps you in debt longer.
The bankers are perfectly OK if you keep yourself in debt forever. It’s up to you to be smart and not fall for the trap of keeping your payments low so you can go take on more debt to buy a house.
Here’s another quote.
“Extending the student loan debt can help mortgage eligibility.
For those whose monthly income is already heavily sliced with student loans, extending the repayment term can leave more room for a mortgage payment, making it easier to afford a home.”
Their advice here is to look at ways to extend the life of your loan by lowering the payment. This is usually done by consolidating your loans if you have multiple loans
In most cases, consolidating your loans is a horrible idea that can have a number of negative consequences. But even if you can do it without creating other problems, you are only increasing the total amount of money you will have to pay back. You are making the loan more expensive. And you are making it last even longer. Yuck.
The goal is to get rid of the debt so you can start using more of your income to build a strong financial foundation in your life. Not to mention the fact that you want to start saving for your children’s college education. That way you and your children can avoid student loans in the future.
And one final quote.
“How important is it to buy a home?
Extending student loans can make room for a mortgage, and it may also allow you to save to buy a home later, Baumbach says.
Indeed, although it may be possible to afford a home by getting a Federal Housing Administration-insured mortgage with a small down payment, lenders want to see emergency savings, too, Chedester adds.
Baumbach says it’s financially smart to buy a home when mortgage payments are manageable, they compare favorably to what you would pay in rent, and “you’re sure you’ll stay there a few years.”
Many young adults, he says, need to be able to move anytime for a new job. Some will decide they don’t want a home badly enough to extend their student loans or skimp to get the necessary savings.”
What happens to many people who buy a house when they are already deep in debt (and have very little money saved) is their dream of home ownership quickly turns into a nightmare.
Buy a home once you have paid off all your debt, including your student debt. That way you are strong financially and you can handle the purchase.
That’s the smart way to buy a home.
It’s the smart way to create freedom from your student loans.