Buy a house during the COVID student loan moratorium? Here's your action plan for making house payments when student loan payments return.
Last December, the Biden administration gave millions of student loan borrowers in the U.S. a last-minute holiday gift by extending the COVID student loan moratorium until May 1. Then the administration extended it again to Aug. 31, 2022, giving borrowers more time to prepare to make payments again.
Now, that deadline is looming, and borrowers who became new homeowners while their student loans were in forbearance may be nervous about managing both debt obligations. What should you do when the day arrives that you have to resume payments?
While your lender would have factored student loan payments into your debt-to-income ratio (DTI)*, the reality of juggling a mortgage payment and student loans may be a little overwhelming.
Seeing those numbers on paper is one thing. Actually having to make the payments is another, especially if you’re still getting used to having a mortgage payment every month.
Fortunately, the student loan moratorium extension gives you a few more months to prepare, and there are ways to make the adjustment easier on yourself.
Before we get into how you can do that, however, we need to acknowledge something crucial: A recent survey from Student Loan Planner found that 1 in 14 people with high student loan debt experienced suicidal ideation because of their student debt.
If your mental health is suffering because of student debt, prioritize your health, first and foremost. Talk to your doctor or other healthcare provider, or contact a suicide prevention hotline.
The number for the National Suicide Prevention Lifeline is 1-800-273-8255.
However much you owe in student loans, or any kind of debt, it’s not worth your life or your health. There are always options for dealing with debt, regardless of how insurmountable it may seem.
Here’s how to be proactive about making both your student loan and mortgage payments without feeling stretched too thin.
Income-based repayment (IBR) plans adjust your monthly payments to how much you earn, which is particularly helpful if you’re carrying significant student loan debt that’s accrued a lot of interest over the years.
You recertify your IBR plan each year – but don’t worry, this is simpler than it sounds. Your servicer will contact you when it’s time to recertify, and it only takes a few minutes if you have your tax return handy.
The annual recertification means that your payment stays manageable. If your income drops next year, your payment amount will adjust down accordingly, so you’re not scrambling to make do while earning less.
Assuming your income and spending habits haven’t changed much since you bought your house, your student loan payment should fit into your budget.
“Understand that your lender included a predicted payment attached to your student loans into your debt ratio when they qualified you to purchase your home,” says Joe Pessolano, a branch sales manager with Fairway in Garner, North Carolina. “As long as you have not opened new credit lines, you should be able to comfortably make the payments when the loans come out of forbearance.”
"Understand that your lender included a predicted payment attached to your student loans into your debt ratio when they qualified you to purchase your home."
Joe Pessolano, Fairway branch sales manager
Pessolano recommends working out a monthly budget before student loan payments resume to see whether you need to make any adjustments. If you have opened new credit cards or taken on other debts besides your mortgage and student loan, you may want to pay those down ahead of the student loan moratorium ending, he says.
Now is also a good time to do some budget trimming. Even seemingly small amounts here and there – the HBO Max subscription, the Disney+/Hulu/ESPN bundle, the weekly pizza delivery through Uber Eats – can add up to a lot. Trimming where you can now will make it easier to transition once the COVID student loan forbearance ends.
The sooner you work out your new budget, the better. If you figure out how much you’ll need to cover your student loan payments, mortgage payments, and your other expenses now, you can “practice” with that number until May.
Here’s what we’re trying: Set aside the amount you’ll need for your student loans each month, even before payments resume. Then it won’t feel like as much of a pinch once they kick in, and you’ll even have a few months of payments saved ahead of time. Knowing that money is already earmarked for student loans can stave off anxiety about how you’re going to afford your mortgage and student loans.
But remember, you and your lender already prepared for this. Because they built your student loans into your DTI, they wouldn’t have loaned you more money than you could afford while paying your mortgage and student loans. So while the idea of paying both at once might seem frightening, the reality probably won’t be as bad as you’re expecting.
If possible, pick up additional shifts at work. Or consider taking on a part-time job or starting a side gig. You don’t need to work 24/7 – even a few hundred extra dollars a month could cover part or all of your student loan payment. Then you won’t worry about not being able to afford your mortgage, defaulting on your student loans, or sacrificing other long-term goals (such as investing or saving for other big picture needs).
If you’re worried about making your student loan and mortgage payments on top of high-interest credit cards and other debts, Pessonalo suggests considering a consolidation loan. You may be able to take out a personal loan at a lower interest rate than you’re currently paying, and you can use that money to pay off high-interest credit cards and other debts. You’ll still need to make the personal loan payment each month, but you may save money on interest. And you’ll have fewer debt accounts to manage.
Don’t wait until you’ve fallen behind on your mortgage or student loan payments to ask for help. Call your mortgage or student loan servicer (the company you make your payments to), and tell them you’re having trouble as soon as possible. They may be able to work out a new payment plan or other arrangements to help keep your account current.
But if you wait, interest will accrue and your accounts could be reported as late or delinquent. Not only will you owe more at that point, your credit will suffer. Communicating early with your servicers can help you stay on track with your payments and avoid negative financial effects.
As anyone with student loan debt knows, there are no shortcuts for paying it off. But smart budgeting, getting on an IBR plan, and seeking out help when you need it can help you avoid making the pay-off process harder than it needs to be.
While it may be tempting to wait until late August to think about your student loans, making a gameplan now will alleviate stress and create a buffer in case you have financial emergencies this year. Most importantly, it will decrease the chances that you’ll fall behind on your student loans or your mortgage payment. And if there’s one thing you don’t need while paying down student debt, it’s worrying about being able to keep your home.
So, start preparing early – and take deep breaths. If you stick to your budget (and give yourself some grace when needed), you can manage your student loans while also thriving in your new house.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.