New Student Loan Plan May Make It Easier For Borrowers To Buy a Home

A new student loan repayment plan released by the Biden administration may make it easier for some homebuyers to get approved for a mortgage, according to a new report.

The joint report, released this week by the Center for Responsible Lending (CRL) and California Policy Lab (CPL), suggests that Biden’s new Saving on a Valuable Education (SAVE) plan will improve many borrowers’ debt-to-income (DTI) ratios. This may make it more likely for borrowers in the housing market to get approved for mortgages. 

 “SAVE will protect more borrowers’ incomes and help them achieve homeownership, especially if complementary policy changes are implemented in mortgage underwriting,” said Lucia Constantine, researcher at CRL and co-author of the report, in a statement. “Our analysis found that enrolling in SAVE could provide a needed boost toward homeownership for low- and moderate-income borrowers. Thus, improving their overall financial health and helping Americans get a step closer to closing the racial wealth gap.”

Here are the details.

SAVE plan can lower payments and lead to student loan forgiveness

The new SAVE plan is an income-driven repayment (IDR) option released by the Biden administration in the fall of 2023. SAVE results in lower monthly payments for many borrowers. Compared to other IDR plans, the program has a higher poverty exclusion limit (meaning it considers less of a borrower’s income when calculating monthly student loan payments) and a more favorable repayment formula. 

Related: Biden Administration Officially Launches the “Most Affordable Student Loan Plan Ever”

“The SAVE Plan decreases monthly payments by increasing the income exemption from 150% to 225% of the poverty line. This means SAVE can significantly decrease your monthly payment amount compared to other IDR plans,” according to Education Department guidance. 

Under the SAVE plan, a single borrower making $60,000 per year would pay around $220 per month under SAVE, compared to $310 under the now-defunct Revised Pay As You Earn (REPAYE) plan or $470 under Income-Based Repayment (IBR). That same borrower with a family size of three would only pay around $35 per month under SAVE. 

SAVE has other beneficial features, too. These include a generous interest subsidy that “eliminates 100% of remaining monthly interest for both subsidized and unsubsidized loans after you make a full scheduled payment,” according to the guidance. “This means that if you make your monthly payment, your loan balance won’t grow due to unpaid interest that accrued since your last payment.” Married borrowers can also exclude their spouse’s income by filing taxes separately, unlike SAVE’s predecessor, the REPAYE plan.

Related: 5 Myths About the New SAVE Plan, Demystified

Borrowers enrolled in SAVE can be eligible for student loan forgiveness in as little as 10 years if their initial balances were $12,000 or less. The Biden administration recently accelerated this provision of SAVE, which had been scheduled to go into effect in summer 2024. Most other borrowers would receive loan forgiveness at the 20-year or 25-year mark. 

Report highlights home buying benefits of SAVE plan

According to the joint report released this week by the CRL and CPL, lower payments under SAVE will improve borrowers’ debt-to-income (DTI) ratios. That, in turn, will make it easier for borrowers to get approved for mortgages. 

“Student debt directly delays homeownership because of its negative impact on the ability to save for a down payment,” explains the report. “It also increases DTI ratios, which lenders use to determine mortgage eligibility and loan size. By reducing monthly payments and protecting a greater portion of income, the SAVE plan allows borrowers to potentially increase the amount of savings they could put toward a down payment on a home. Reduced monthly payments could enable previously ineligible borrowers—as well as those who were already DTI eligible but have not yet purchased a home—to align more favorably with DTI requirements for government insured mortgages and expand or improve their mortgage eligibility.”

The report notes that SAVE could reduce the average monthly IDR payment for borrowers from $197 per month to $69. And borrowers enrolled in the program could see their DTI ratio reduced by 1.5% to 3.6%.

“The SAVE plan could reduce borrowers' monthly payments, subsequently lowering their DTI ratio and improving their likelihood of obtaining mortgage approval,” says the report.

Trickier situation for borrowers with $0 payments under SAVE

The Education Department previously estimated that up to one million borrowers may have a calculated payment of $0 per month under SAVE, if their income falls within the program’s generous poverty exclusion limit. A single borrower with a family size of one making $32,800 per year would have a $0 payment, as would a borrower with a family size of four making $67,500 or less.

But borrowers enrolled in IDR with $0 payments have historically encountered difficulty when trying to obtain a mortgage. In some cases, mortgage underwriters have used alternative metrics to “infer” a borrower’s minimum-required monthly payment, even when they were required to pay nothing under an IDR plan. This could have a negative impact on their DTI ratio, harming their chances of mortgage approval.

The Federal Housing Authority (FHA) recently adopted more flexible underwriting standards to make it easier for borrowers with a $0 IDR payment to qualify for a mortgage. But even under these guidelines, the underwriter must compute the DTI ratios using 0.5% of the outstanding student loan balance if the calculated IDR payment is $0. That could a problem for borrowers, particularly those with larger student loan balances.

In their report, the CRL and CPL urged the FHA to adopt new underwriting standards that would allow borrowers with a $0 IDR payment to more easily get approved for mortgages. 

“For the benefits of SAVE to be fully realized, underwriting criteria for federally insured mortgages must reflect actual payments, even if that payment is $0,” concluded the report. “If the FHA were to use the same underwriting criteria as Fannie Mae, which counts actual payments even if they are $0, borrowers making $0 payments could experience a reduction in DTI from between 3.8% to 7.1%.”

“The recent student loan crisis, as well as higher mortgage rates, have prevented younger and low-income borrowers from accessing this wealth-building mechanism,” said Christelle Bamona, senior researcher at CRL and co-author of the report, in a statement. “It is critical for the administration and federal agencies to work together to implement underwriting standards that accurately reflect borrowers' payment obligations. Effectively adjusting the way DTI is calculated will contribute to a healthier and more vibrant economy that benefits all Americans.”

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