Financial advisors whose clients have student loans, co-signed student loans or want to help a borrower repay their student debt should take note of new policies from Fannie Mae, which also make it easier for those borrowers to qualify for a mortgage.
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Under the expanded Innovative Solutions for Borrowers with Student Loan Debt, Fannie Mae, the biggest buyer of home mortgages from lenders, has eliminated the 0.25% standard fee for cash-out refinancings. With such refinancings, a homeowner can borrow more than the amount of the original loan, taking the difference in cash, which can then be used to help pay off the student loan.
Anyone can take advantage of the new policies if their new loan doesn’t exceed Fannie Mae’s cap of $424,000 ($636,150 in Alaska and Hawaii) and if they have enough housing equity, says Jonathan Lawless, vice president of customer solutions at Fannie Mae.
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That includes the 8.5 million homeowners who currently owe student debt either on their own behalf or on behalf of their children, as co-signers of loans or borrowers of Parent Plus loans, and potentially even more. Currently 44 million people owe $1.4 trillion in student debt in the U.S. All mortgage lenders who sell their loans to Fannie Mae, can offer the cheaper cash-out refis, which essentially expands a pilot program that begin in November with nonbank lender SoFi.
“This is a good option for borrowers with high income and stable jobs who are sitting on plenty of home equity,” says Rohit Chopra, senior fellow at the Consumer Federation of America. “There is a major chunk of outstanding Direct and [Federal Family Education Loans] with interest rates at 6.8% (Stafford loans), 7.9% (Direct Plus), and 8.5% (FFEL Plus) and many private loans also carried double-digit interest rates.” They can refinance at rates below 4%.
But “for those who don’t have a secure job, it comes with some risk,” says Chopra.
The primary risk is if a borrower loses his or her job or suffers from some other financial setback. “They will be giving up their rights to income-driven repayment options on federal student loans, which cap those payments to roughly 10% of their income,” says Chopra. “They also won’t be able to adjust their student loan payment down to zero using a federal student loan deferment. Like many financial innovations, there can be gains for many borrowers, though they need to be careful before signing on the dotted line.”
There could also be tax implications. Borrowers who earn less than $80,000 and don’t itemize can deduct student loan interest payments, but taxpayers who do itemize can deduct the mortgage interest payments.