I’ve heard so much about “students drowning in debt” and that it would kill any housing rebound we would see that I was obliged to look into it.
Before we get started I need to set some parameters because conversations like this always get into “who’s side you are on” and the message you try to deliver gets shouted over. So….
1- I think college costs are abhorrent
2- I think Ivy League schools having 20B endowments and charging 45K/yr for education is loan shark slimy
3- I think is Obama had any balls he would attack this like he attacks the banks/investors/anyone else with money with his “shared sacrifice” drivel
4- I think the explosion in “Financial aid” to schools (that is who gets the money,the student is just simply a transfer mechanism) without caps on tuition increases is 100% directly responsible for out of control tuition inflation.
5- I agree the program is a mess
Now we know where I am starting this little adventure from.
But the question we are asking here is whether or not student loan debt is going to kill the housing rebound.
Here are the current numbers from the Fed. I ignore the “total student debt outstanding” as there will always be more as more people go to colleges each year is greater than the # of payoffs.
Let’s look at the average student loan debt per borrower:
$24K. But that really does not mean anything unless we put that in context as to what it costs the student each month. This site says the average debt is $26K so I’ll split the difference and go with $25K. The typical term is 10yr at ~6.8%. That means a student with $25k in debt pays ~$287/month for ten years.
Now, we should note that there are plenty of options for the student to reduce that payment by as much as 50% per month should they want to:
Types of Repayment Plans
The repayment plans are as follows:
Standard Repayment. Under this plan you will pay a fixed monthly amount for a loan term of up to 10 years. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
Extended Repayment. This plan is like standard repayment, but allows a loan term of 12 to 30 years, depending on the total amount borrowed. Stretching out the payments over a longer term reduces the size of each payment, but increases the total amount repaid over the lifetime of the loan.
Graduated Repayment. Unlike the standard and extended repayment plans, this plan starts off with lower payments, which gradually increase every two years. The loan term is 12 to 30 years, depending on the total amount borrowed. The monthly payment can be no less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must be at least the interest that accrues, and must also be at least $25.
Income-Contingent Repayment. Payments under the income contingent repayment plan are based on the borrower’s income and the total amount of debt. Monthly payments are adjusted each year as the borrower’s income changes. The loan term is up to 25 years. At the end of 25 years, any remaining balance on the loan will be discharged. The write-off of the remaining balance at the end of 25 years is taxable under current law. There is a $5 minimum monthly payment. Income Contingent Repayment is available only for Direct Loan borrowers.
Income-Sensitive Repayment. As an alternative to income contingent repayment, FFELP lenders offer borrowers income-sensitive repayment, which pegs the monthly payments to a percentage of gross monthly income. The loan term is 10 years.
Income-Based Repayment. The College Cost Reduction and Access Act of 2007 introduced income-based repayment as a more generous alternative to income-sensitive and income-contingent repayment, starting on July 1, 2009. Unlike income-contingent repayment and income-sensitive repayment, it is available in both the Direct Loan and FFEL programs. Income-based repayment is like income contingent repayment, but caps the monthly payments at a lower percentage of a narrower definition of discretionary income.
All six plans are available for student loans, but only the first three plans are available for parent loans.
Loan Term for Extended/Graduated Repayment
For extended and graduated repayment, the following chart shows how the maximum loan term depends on the amount borrowed.
Loan Balance Maximum Loan Term
Less than $7,500 10 years
$7,500 to $9,999 12 years
$10,000 to $19,999 15 years
$20,000 to $39,999 20 years
$40,000 to $59,999 25 years
$60,000 or more 30 years
Further depending on where you go to school, your debt load varies