Does Homeownership Education Make a Difference?

If you’re a first-time buyer, you may have encountered lenders who either suggest or require you to take a homeownership education course in order to be approved for a loan. Homeownership, or homebuyer, education won’t help you find an affordable house in a tight market or outbid another buyer for the home of your dreams. Its goal is not so much to help you buy a house as it is to help you keep it.

Buying and selling homes are the most expensive transactions most Americans encounter in their lifetimes. Homeownership requires going into debt to the tune of hundreds of thousands of dollars― mortgages turn new homeowners into debtors for decades. One or two mistakes in the planning and process of buying a home could leave you so financially strapped that you must live “house poor” for years. One or more irresponsible lapses in money management in the years that follow, such as cashing out too much equity and leaving yourself vulnerable to the next housing downtrend, will spell trouble and could cost a family their home.

Young entrepreneur sitting at a table at home using a laptop and reading paperwork while preparing packages for delivery to customersYoung entrepreneur sitting at a table at home using a laptop and reading paperwork while preparing packages for delivery to customers

What Homeowner Education Involves

Homeownership education courses can be taken either online or in person. The average course takes about four to six hours to complete and can be completed in one Saturday afternoon.

The National Industry Standards for Homeownership Education and Counseling, which approves courses and educators, recommends a standard format, covering:

  • Assessing homeownership readiness
  • Budgeting and credit
  • Financing a home
  • Shopping for a home
  • Maintaining a home and finances

Does Homeownership Education Work?

Beginning In 2014, HUD launched a large-scale experiment to assess the impact of homebuyer education and counseling for a diverse sample of more than 5,800 low-moderate and middle-income prospective first-time homebuyers in 28 U.S. metropolitan areas.

Preliminary findings covering the first released in June 2019 found mixed evidence of the impact of homebuyer education and counseling. No impact was detectable on the study’s main gauge of “success”—the 60-day mortgage delinquency rate-bur early results did show that homebuyers were more prepared and more successful in-home search. Results included:

  1. Greater confidence in the ability to find needed information.
  2. Higher rates of home purchase by young adults. For those aged 29 or younger at the time they enrolled in the study, the treatment group had higher rates of homeownership than their control group counterparts.
  3. Greater satisfaction with the homebuying process.
  4. Greater likelihood of having their mortgage payments automatically deducted from their bank accounts.

On the other hand, the study found:

  1. No detectable impact on loan performance measures. No impact was detectable on the 30-, 60-, or 90-day delinquency rates;
  2. Higher levels of debt. The treatment group experienced higher levels of non-housing debt—primarily student loan debt—had a slightly higher monthly debt-to-income ratio than the control group (0.27 versus 0.26), although the treatment and control groups were equally likely to have debt-to-income ratios that exceeded 0.43, the upper limit specified by FHA guidelines.
  3. Greater prevalence of high monthly housing costs relative to income. Overall, treatment group members more often had housing costs that exceeded 30 percent of their household income than did the control group.
  4. Lower reported ability to cover all bills. Overall, a higher proportion of the treatment group than the control group reported occasionally not having enough money to cover bills. Treatment group members offered remote services were more likely to say they would contact their lender if in financial distress.
  5. Treatment group members offered remote services reported higher student loan balance and several other outcomes, particularly on those in the domains of preparedness and search and financial capabilities.

When the final report is available in 2021, it is expected to have long term data, especially results on the impact homeownership education has on 30 to 90-day delinquency and default. At least until then, homeownership education and counseling will play a vital role in preparing new buyers for the financial costs of homeownership.

Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.


Student Loans: Which Repayment Plan is Right for You?

When I graduated from college *ahem* eons ago and it came time to pay off my federal student loans, I had no clue there were different options. I opted into the standard repayment plan because I didn’t know any better. Looking back, if I had been aware that there are quite a few different repayment options, I would’ve done my due diligence to see which was the best fit for my budget. 

I’d love to prevent you from making the same mistakes I made. Here’s how to go about gauging which student loan repayment is best for you: 

Research Your Options 

You’re placed in the standard 10-year repayment plan by default. However, this is typically the highest monthly payment plan. “So, before you fret about whether you can afford your student loans, look at what other payment options are available,” says Robert Farrington, founder of The College Investor. 

Here are the student repayment options to choose from: 

Standard Repayment Plan. The standard repayment plan is the most basic one. If you don’t choose a repayment plan, this is the one you’ll default into. You’ll be required to pay a fixed amount for 10 years. 

Graduated Repayment Plan. The payment structure is graduated. Your payments start lower at first and will increase every two years. You’ll be required to pay off your loans within 10 years. 

Extended Repayment Plan. Payments will be either fixed or graduated, and the amount will be lower than both the standard repayment plan and the graduated repayment plan. You’ll pay off your loans within 25 years. 

Revised Pay As You Earn Repayment Plan (REPAYE). Under REPAYE, the amount you owe each month will be 10 percent of your discretionary income. 

If your loans were for undergraduate studies, you’ll have 20 years to pay off your balance. If you took out any loans for graduate or professional studies, you’ll have 25 years to pay off your student debt. Any remaining balance after that time will be forgiven. 

With all income-based repayment plans, your monthly payments are recalculated each year. And how much you pay is dependent on the size of your family and your income. 

Pay As You Earn Repayment Plan (PAYE). With PAYE, you’ll pay 10 percent of your discretionary income. But it will never be more than what you’ll be paying if you opted for the standard repayment plan. To qualify for PAYE, you must be a new borrower on or after October 1, 2007. With PAYE, any outstanding loans will be forgiven after 20 years. 

Income-Based Repayment Plan (IBR). If you’re on an IBR plan, your monthly payments will be either 10 or 15 percent of your discretionary income. (Note: They’ll never be more than you would’ve paid under the 10-year standard repayment plan.) The balance on these loans will be forgiven after 20 or 25 years, depending on when you received your first loans. 

Income-Contingent Repayment Plan (ICR). On this income-based repayment plan, your payment would be either 20 percent of discretionary income or the amount you’d pay on a repayment plan with a fixed payment over 12 years, whichever is less.

Income-Sensitive Repayment Plan. Under this plan, your monthly payments are based on your annual income and can increase or decrease if your income changes. Your student loan balance will be paid off within 10 years. 

Know What You’re Eligible For

To narrow down your choices, figure out which repayment plans you’re eligible for. Some repayment plans are only available if you’ve taken out certain loans or if they’re over a certain amount. For the nitty-gritty details, you can check out the U.S. Department of Education’s Federal Student Aid website. 

There’s also Public Service Loan Forgiveness (PSLF), which is for those who are working in the government, serving in the military, or employed by non-profits. To be eligible for PSLF, you must be on an income-driven plan. 

Figure Out Which Plan Works Best for Your Budget 

The most important thing when it comes to repayment is whether you can keep up with payments. “The best repayment plan for you is the one that you can afford to make the payments on every month — without missing,” says Farrington. After all, this is a bill you could have to pay for the next 25 years. 

Because the standard repayment plan has higher monthly payments, an income-driven plan might be the best fit for your budget, explains Farrington. Income-driven plans — such as Income-Based Repayment, Pay As You Earn, and Revised Pay As You Earn — set your monthly payment at a percentage of your income. It’s either 10 percent or 15 percent of your discretionary income. “This can be helpful when you’re just starting, as your payments could legally be as low as $0 per month if your income is low enough,” says Farrington. 

On the flip side, lowering your monthly payments and stretching out the time it takes you to repay your student debt means you could be paying more in the long run. That’s because you’ll be paying more on the interest. 

If you’re not entirely sure which repayment plan is the right one for you, no need to fret. Just remember that you’re not tied down to a particular plan for the duration of the loan.

Your Repayment Plan Isn’t Set in Stone

Here’s the good news: you can change your repayment plan at any time. If you’re moving from a standard, extended, or graduated plan, you can move to an income-driven plan without any concerns, says Farrington. 

Don’t delay paying off your loans simply because you’re afraid of being locked into making the same payments every month for the next decade. Who knows what might change for you financially? “If budgeting is an issue, don’t defer your loans because you can’t pay,” Farrington adds. “Instead, switch to an income-driven plan and base it on your new income.” 

But if you’re already on an income-driven plan, and you decide to switch to a standard repayment plan, there is something you’ll want to take into consideration: any unpaid interest will capitalize on the loan.

Choosing a repayment plan for your student debt can feel disorienting. But by knowing the basic details, you can better gauge which repayment plan is the best fit for your budget. 

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