A row of mansions in Alexandria, Virginia.
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A new, more affordable repayment plan for federal student loan borrowers may have another benefit: It could make it easier to become a homeowner.
Saving on a valuable education, or SAVE design, can cut borrowers’ monthly payments in half and leave many people with a $0 bill. The Biden administration officially unveiled “the most affordable repayment plan” over the summer.
“Moving into a repayment plan that has a lower monthly payment can help a borrower qualify for a mortgage,” said higher education expert Mark Kantrowitz.
Half of student loan borrowers — including 60% of millennial borrowers — who have yet to buy a home say education debt is holding them back from doing so, according to a 2021 report from the National Association of Realtors.
Here’s how the SAVE plan could soon change that, experts say.
Lower payments can help prospective homebuyers
Your debt-to-income ratio, which is usually calculated by dividing all of your monthly debt by your monthly income, is a key factor in getting a mortgage, he said. Christel Bamonasenior researcher at the Center for Responsible Lending.
“Those eligible for SAVE will experience reduced payments, which in turn will reduce their debt-to-income ratio,” Bamona said. Most borrowers should qualify for the SAVE program as long as their loan is in good standing.
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Borrowers making payments on their student debt who enroll in SAVE could see their rate drop to somewhere between 1.5% and 3.6%. according in a new report by the Center for Responsible Lending.
Here’s how this happens.
For one, the SAVE program raises the income excluded from calculating your payment to 225% of the poverty level, up from 150%. As a result, the first approximately $33,000 of your income will not count toward your monthly obligation, up from approximately $23,000 in the other income-based repayment plans. These numbers represent individuals. More income is protected as family size increases.
From July, an even bigger benefit of the plan will be available.
Instead of paying 10% of your discretionary income per month towards your undergraduate student debt under the previous Revised Pay As You Earn Repayment Plan or RETURN, borrowers will only be required to pay 5% of their discretionary income. The SAVE program has replaced REPAYE.
Kantrowitz gave some examples of how much borrowers could see their bills drop.
Previously, someone making $40,000 a year would have a monthly student loan payment of about $151. Under the SAVE program, their payment will be reduced to $30.
Likewise, someone earning $90,000 a year could see their monthly payments shrink to $238 from $568, Kantrowitz said.
In the past, most mortgage lenders assumed a borrower’s monthly student loan payment was a certain percentage of their loan balance, even if the actual payment was lower, Kantrowitz said.
Fortunately, he said, “Now they’re building on it the actual payment of the loan.”
There’s a catch: Many mortgage lenders won’t use a $0 monthly student loan payment in their underwriting process, which the SAVE program could leave many borrowers out of. In such cases, lenders can calculate your monthly liability as a share of your total debt.
The Center for Responsible Lending wants to see that change.
“By not counting their monthly payments as $0 in the underwriting process, lenders are artificially inflating consumers’ monthly debt,” Bamona said. That could potentially prevent millions of low-income Americans from getting a mortgage, he added.
Saving for an advance can be easier at SAVE
The SAVE plan can also help more people qualify to buy a home, experts say. That’s because a smaller monthly payment could allow them to direct more cash into their savings and reach their down payment goal faster.
Student loan borrowers who are first-time home buyers may also be eligible for financial assistance, Bamona said, and should research their options.
“Grants or down payment assistance programs may be accessible to first-time home buyers, provided by agencies and organizations within their state or municipality,” he added.
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