Under the Biden-Harris administration’s student loan SAVE repayment plan, low- to moderate-income borrowers may be able to not only save more money, but also have an easier time owning homes for themselves, according to a joint report from the Center for Responsible Lending (CRL) and the California Policy Lab (CPL).
Christelle BamonaCenter for Responsible Lending
The Saving on a Valuable Education (SAVE) plan is an income-driven repayment (IDR) plan meant to reduce the monthly payments that borrowers have to make, down to even $0 a month. IDR plans calculate repayment amounts based on income and family size.
The plan aims to achieve its goal by raising federal poverty guidelines so that less of people’s incomes are counted as “discretionary income” and by shrinking the percentage of discretionary income factored into monthly repayment values. Earlier this year, the U.S. Department of Education (ED) announced that those who borrowed $12,000 or less can have their loans forgiven after as few as 10 years of repayment.
Since its unveiling as the “most affordable student loan repayment plan ever” about two months after the Supreme Court 2022’s rejection of the administration’s major student debt cancellation effort, the plan has seen 6.9 million borrowers enrolled, according to ED.
The report, "Unveiling the Potential of Saving on a Valuable Education (SAVE)," CRL researchers examined credit data shared by the CPL to assess how the SAVE plan can help borrowers repay less each month. Much of CRL’s analysis for the report revolved around the Millennial generation, because the typical IDR-enrolled borrower is 38 years old, according to CRL researchers. And IDR-enrolled borrowers usually have annual low- to moderate- incomes, the report stated.
Millennial IDR borrowers could see their monthly repayment values drastically go down by more than $100 under the SAVE plan, the report noted. Average monthly payments of $193 would decrease to $67 for those with only undergraduate loans and $117 for those with both undergrad and graduate loans.
And notably, borrowers from majority minority neighborhoods – zip codes with populations of at least 50% Black or Latino residents – could see larger monthly payment reductions than those from majority-White neighborhoods, according to the report.
The reduced payment values brought about by the SAVE plan can also potentially affect the likelihood of borrowers being able to get mortgages for houses, the report’s authors wrote.
"There is limited research on how this plan could impact other dimensions of financial security for borrowers. For example, how could this plan affect borrowers' ability to obtain wealth-building assets, like mortgages or business loans?" said report co-author Christelle Bamona, senior research at CRL. "Research has shown previously that student loan debt has prevented several families from acquiring assets like homes. And owning a home has traditionally been considered as something crucial for attaining financial security and also building generational wealth."
According to the report, a 2017 National Association of Realtors (NAR) survey indicated that student loan debt stands as a significant obstacle to people owning homes. 85% of respondents reported that they couldn’t “save for a down payment because of student debt” and 74% reported that they didn’t feel “financially secure enough because of existing student debt to buy a home.”
Related to this issue is the concept of a person’s debt-to-income (DTI) ratio – total monthly debt payments divided by gross monthly income – which is one of the factors looked at for mortgage approval. According to the NAR survey, high DTI ratio was the most cited reason that non-homeowner’s mortgages were denied (17%.)
By potentially decreasing the monthly amount that borrowers have to repay, the SAVE plan can subsequently reduce their DTIs as well and make it less likely that their mortgages are denied, the report authors wrote.
Under the Biden-Harris administration’s SAVE plan, non-homeowning Millennial IDR-enrolled borrowers paying back undergrad loans could see DTI ratio decreases of 1.5% to 3.6%, the report authors wrote.
One hurdle to such improvement is the specific way in which federal agencies dealing with loans and mortgages, such as the Federal Housing Administration (FHA), interact with $0 monthly repayments.
Although one agency, the Federal National Mortgage Association (Fannie Mae), uses $0 monthly payments for its DTI ratio calculations, many others do not. Instead, the FHA and several other agencies, when faced with borrowers paying $0 a month, opt to calculate DTI ratios based on 0.5% of the borrower’s total loan balance instead of the $0 repayment.
Collectively switching over to Fannie Mae’s methodology could benefit millions of borrowers and reduce DTI ratios for millennials by several percentage points, according to the report and its adjoining CRL policy recommendations.
“The failure to allow or require $0 federal student loan repayments in current mortgage underwriting standards results in potential millennial borrowers having a 3.8% to 7.1% higher debt-to-income ratio than their actual DTI,” according to the report recommendations. “Given this, the failure to fully incorporate the benefits of the SAVE program for borrowers eligible for $0 repayments serves as a barrier to securing a federally guaranteed or federally supported mortgage for as many as 3.9 million of the currently enrolled 6.9 million SAVE borrowers, which includes 3.4 million renters.”
CRL researcher Lucia Constantine and CPL Executive Director Evan White served as the report’s other co-authors.
“In order to fully actualize some of the benefits that go along with SAVE, some of the federal housing agencies need to revise their underwriting criteria so that IDR borrowers who are making $0 payments can increase their possibilities of homeownership,” Constantine said.
The researchers note that the analyses included in the report does not account for borrowers who are not at all enrolled in an IDR plan to begin with.
