New Student Loan Repayment Plan Offers Hope for Prospective Homebuyers

The SAVE Plan Could Ease Financial Burden and Improve Mortgage Eligibility

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The introduction of the Saving on a Valuable Education (SAVE) plan, designed to provide more affordable repayment options for federal student loan borrowers, may offer an unexpected advantage: facilitating homeownership. By reducing monthly loan payments, the SAVE plan aims to alleviate financial strain and improve borrowers’ eligibility for mortgages.

According to higher education expert Mark Kantrowitz, transitioning to a repayment plan with lower monthly payments can enhance a borrower’s ability to qualify for a mortgage, potentially addressing the concerns of many student loan borrowers who cite their debt as a barrier to homeownership.

Christelle Bamona, a senior researcher at the Center for Responsible Lending, highlights the pivotal role of debt-to-income ratio in mortgage underwriting. Borrowers enrolled in the SAVE plan may experience a reduction in their debt-to-income ratio, as their monthly loan payments decrease. Most borrowers are eligible for the SAVE plan as long as their loan remains in good standing.

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The SAVE plan introduces significant changes that can positively impact borrowers’ financial outlook. Notably, the plan increases the income exempted from payment calculations, offering relief to borrowers earning below 225% of the poverty line. Additionally, the plan reduces the required monthly payment from 10% to 5% of discretionary income, replacing the previous Revised Pay As You Earn Repayment Plan (REPAYE).

Kantrowitz provides examples illustrating the potential savings under the SAVE plan. For instance, a borrower earning $40,000 annually could see their monthly payment decrease from approximately $151 to $30. Similarly, an individual earning $90,000 annually may witness a reduction from $568 to $238 per month.

However, challenges remain in mortgage underwriting practices. While some lenders now consider the actual student loan payment rather than a percentage of the loan balance, many still hesitate to accept a $0 monthly payment, as facilitated by the SAVE plan. This discrepancy may artificially inflate borrowers’ perceived debt obligations, potentially hindering mortgage eligibility, particularly for low-income individuals.

The Center for Responsible Lending advocates for policy changes to address this issue, emphasizing the importance of accurately reflecting borrowers’ financial circumstances in mortgage underwriting. By recognizing the benefits of the SAVE plan and adopting fairer lending practices, lenders can contribute to expanding access to homeownership for millions of Americans.