What percentage of your gross salary does the Consumer Financial Protection Bureau suggest your student loan payment be in order to be affordable and limit your risk of delinquency and default?
The correct answer and explanation is :
The Consumer Financial Protection Bureau (CFPB) recommends that your student loan payment should not exceed 10% of your gross monthly income in order to be considered affordable and limit the risk of delinquency and default.
Explanation:
The 10% recommendation comes from the CFPB’s research on what constitutes an affordable loan payment for borrowers, taking into account their financial well-being and ability to pay for living expenses. When your monthly student loan payment is more than 10% of your gross income, it can put a significant strain on your financial stability, leading to challenges in meeting other essential financial needs like housing, food, transportation, and healthcare.
High student loan payments relative to income can lead to delinquency, where payments are missed or delayed, and default, where loans are not paid for a prolonged period (typically 270 days for federal loans). Both of these issues can have long-term financial consequences, such as damaged credit, wage garnishment, and reduced access to other forms of credit.
The 10% guideline is also in line with various income-driven repayment (IDR) plans available for federal student loans. Under these plans, monthly payments are calculated based on a borrower’s income and family size, and they aim to keep payments at or below a percentage of the borrower’s discretionary income, which is often around 10%.
If your student loan payments exceed 10% of your gross income, you might consider exploring options like income-driven repayment plans, refinancing, or extending the term of your loan to reduce monthly payments. It’s crucial to be proactive in managing your loans to prevent financial hardship and ensure that repayment remains sustainable throughout the life of the loan.
Overall, the 10% threshold helps borrowers avoid falling behind on their loans while maintaining the ability to meet other financial obligations.