Are student loans the next mortgage crisis?

This watchdog thinks student loans are the next mortgage crisis.

Here’s what you need to know.

Student loans: watchdog

Mike Calhoun, who directs the nonprofit Center for Responsible Lending, sees many similarities between the mortgage crisis of 2007-2008 and student loans today. The latest student loan debt statistics show that there are approximately 45 million borrowers who collectively owe $1.6 trillion. This makes student loan debt the second highest category of consumer debt.

Calhoun shared his perspectives, among others, with NPR:

  • Similar to the mortgage crisis, Calhoun says there is a mismatch between the amount of student debt borrowed and the borrower’s ability to repay student loans.
  • Like the mortgage crisis, minority groups have been disproportionately affected by student loan defaults.
  • Student loan debt hurts borrowers’ credit scores, which hurts their ability to get a mortgage.
  • Similar to the mortgage crisis, loan servicers are not properly advising borrowers on the right student loan forgiveness and student loan repayment options to avoid student loan default.

Student loans: potential solutions

There is no shortage of proactive measures to help solve the country’s student debt problem. Policymakers, lawmakers, presidential candidates and the private sector have all offered solutions to mitigate the impact of any repeat of the mortgage crisis.

Here are some steps you can follow:

Income-Based Reimbursement: If you’re having trouble repaying federal student loans, enroll in an income-driven repayment plan. An income-based plan, such as Income-Based Reimbursement (IBR) or Income-Based Payment (REPAYE), for example, lowers your monthly payment based on your Discretionary Income. This can help provide short-term relief, though interest is accumulating on your federal loans. You may also qualify for student loan forgiveness on the remaining balance of your federal student loan after 20 to 25 years.

Student Loan Forgiveness: Civil Service Loan Forgiveness is the main federal government program that will forgive all of your federal student loans. You must meet all the requirements, which includes making 120 monthly payments while working for a qualified utility or nonprofit employer. Don’t fall for companies that promise to forgive all your student loans – they don’t exist.

Borrow responsibly: The best way to borrow for college or graduate school is to borrow responsibly. Pay for higher education with funds in this order: grants and scholarships first, then federal student loans, then private student loans. It is important to note that scholarships and grants do not have to be repaid and that federal student loans come with protections for borrowers. Private student loans are also a good option. A qualified co-signer can help you get a lower interest rate. Private student loan interest rates can often be lower than federal student loan interest rates, depending on your credit score and income or that of the co-signer.

Lump sum payment: You can pay off your student loans faster if you make additional lump sum payments. You don’t just have to pay the minimum payment. If you have extra income of any amount, make an extra payment for your student loan. Additional sources of income could include a bonus, tax refund or holiday gift. Tell your student loan officer in writing to apply the lump sum payment to your principal balance only (not your next month’s payment) so you can reduce the amount of interest you owe.

This lump sum payment calculator tells you how much you can save when you make a lump sum payment on your student loans.

Refinance student loans: You can lower your interest rate when you refinance student loans with a private lender. Lower interest rates mean you can lower your monthly payment and save thousands of dollars in interest. The best time to refinance student loans is whenever you can get an interest rate lower than your current interest rate. There are no fees to apply and no prepayment penalties, so you can pay off your student loans sooner. You can also continue to refinance as often as you like, as long as you can get a lower interest rate. Student loan refinance rates are now ridiculously cheap, starting at 1.9%.

This student loan refinance calculator shows you how much you can save.