The Crossroad of Student Loan Debt and Home Equity

Earlier this month, Fannie Mae along with SoFi, an online personal finance company, announced their Student Loan Payoff Refi solution, a product designed to help consumers pay off student loan debts earlier, allowing for potentially more financial freedom. DS News sat down with Jonathan Lawless, VP of Product Development and Affordable Housing for Fannie Mae, to discuss the solution and the anticipated outcome of implementation.

Lawless is responsible for developing solutions and leading several key offerings from Fannie Mae to address challenges in access to credit; including HomeReady™ the company’s flagship affordable mortgage product, and FM Connect, an end-to-end, dynamic reporting tool for Fannie Mae’s customers.

What is the Student Loan Payoff Refi solution?

The program is an opportunity for people that have equity in their home and also have student debt or have co-signed on student debt that typically carries a higher rate that you would on a typically mortgage. The concept that we have developed is to be able to leverage that equity, take cash out of your home, and increase the balance on your home loan to pay off the balance on your student debt. As a result of doing so, your overall interest rate on both pieces of debt go down and will save consumers money in the long run.

What were the motivations driving the creation of this solution?

We had been looking at a lot of solutions to help our lenders reach the next generation of homebuyers and the biggest obstacle we continue to hear from our partners in the industry are that the burdens of student debt are causing people to become homeowners later in life or choose not to become homeowners at all. As we were thinking through a variety of solutions to this issue, we were looking at the total amount of housing equity that existed in today's market, something approaching about $8 trillion. That really dwarfed the $1.4 trillion in student debt that is out there in the market. Our first thought was how can we leverage existing equity to help pay down some of that debt for today's new buyers (Millennials). As we explored that concept, we thought "Well borrowers who are co-signed on their kid's student debt could potentially consolidate that debt into their own mortgage thereby freeing up the next generation to become homeowners." We approach SoFi to understand the process around refinancing and just how big a market opportunity a product like that might have.

In looking to the future, what outcomes are expected to result from this solution?

We see about 8.5 million consumers who have a home, have equity, and also have student loan debt. So, the idea is that people who have their own student debt or who have taken out a parent plus loan and have a home will be able to save money. Ultimately aside from freeing up the next generation to become homeowners, the idea is that a lot of people can just save money on a monthly basis and as a result of lowering their overall debt obligations, they will also be able to perform better on their mortgages going forward.