Student loan borrowers are carrying debts later into life and are finding it harder to make big purchases, like a first home. In fact, a 2016 survey by the National Association of Realtors, and American Student Assistance, a non-profit, found almost three-quarters of all borrowers say their student loans are the reason they aren't purchasing a house.
Arkansas Public Media's Sarah Whites-Koditschek spoke with Betsy Mayotte of the Center for Consumer Advocacy about a new rule that could make it easier for student loan borrowers with income-based payments, and those in forgiveness plans, to qualify for a mortgage.
According to federal data, 21 percent of Arkansas loan borrowers are on income-based repayment plans.
SWK: What would you say are the top two problems or challenges that people find when they have that student loan debt and they’re trying to move through their lives? What are you seeing as being the biggest concerns about it?
BM: The number one issue that I see right now is borrowers are simply overwhelmed. They are overwhelmed by the amount of debt that they have. They are overwhelmed by the amount of time they realize it will take them to repay it. They are overwhelmed by the number of options that they have.
There are five or six different repayment options alone, and all of those are exactly the same except for they are different. So while those options are really helpful for borrowers, because they’re so confusing, they’re worried that they’re not picking the right one. So that’s definitely the most common issue that I see right now with student loan borrowers. The other issue I see is default and delinquency is still a big issue for student loan borrowers. You know what’s interesting that a lot of listeners may not be aware of, is that the people that tend to go past-due and default on their student loans are not the ones that owe six figures. They’re not your $100 thousand, $200,000 , $300,000 borrowers. They’re actually the ones that only owe $5,000, $10,000, $15,000, and the reason that is, [is] those borrowers tend to have not graduated.
Private student loans can still be a struggle. I mentioned before that federal student loan borrowers tend to have an embarrassment of riches as far as the number of different options they have available to them that provide relief. Private student loans still don’t offer very many, if any, options, if the borrower’s payment is unaffordable. So the people that we can’t help, which are very few, do tend to be the private loan borrowers, because there are still very few, if any, options available, ironically, unless they do go very severely past due on the loans. At that point, more options become available.
SWK: You wrote about this rule change that affects the way that student loans are counted for debt-to-income ratios when calculating a mortgage. Can you explain that?
BM: So Fannie Mae, and for people who aren’t aware of what Fannie Mae is, they are essentially a secondary market for quite a few lenders that offer mortgages. And so, the lenders that do utilize Fannie Mae, they want to make sure that the mortgages they make fit the Fannie Mae guideline if they’re going to use them [in] a secondary market. So Fannie Mae has recently changed their guidelines as to how to look at student loan debt when they are determining the debt-to-income ratio to determine a consumer’s eligibility for a mortgage.
SWK: What difference does that make for someone with a high student loan burden who is on an income-based repayment plan and is trying to buy a house?
BM: First of all, they looked at third party payers as something that is a viable option when determining debt to income. There are a lot more employers these days that are using student loan repayment as a benefit. So in the past, if your employer was paying your student loan for you and you were applying for a mortgage, you still had to count that student loan payment in your debt-to-income ratio, even though you weren’t the one making it. So a really big deal is that Fannie Mae is considering third-party payers now when they look at that debt-to-income, and that could be a parent, or an employer. People that were in the military also receive student loan repayment benefits, so all this can make a big difference.
The other thing is that they are now recognizing borrowers that have income driven repayment plans. Now, in the past, they didn’t recognize it. So essentially, if you were on a payment plan where the payment amount could change, then they wouldn’t count it. They used to count 2 percent. They would assume 2 percent of the loan balance as the payment amount. More recently they changed that to 1 percent. Now, in many cases, they will recognize the income payment plan. So to put that in perspective, say the borrower is $60,000 in federal student loans, and they have adjusted gross income of $50,000, and say there’s three dependents in their family. Under one of the income-driven plans, their payment would end up being around $161. If, however, they were forced to use 1 percent of the balance as their assumed student loan payment, which is how Fannie Mae used to do it, that payment amount would be around $600. So you can see that, by far, can be [the] difference of whether someone qualifies for a mortgage or not.
SWK: Did you hear from many people who did have income-based repayment plans that tried to qualify and found that was the reason they were falling short of the debt-to-income ratio they needed?
BM: Yes, a thousand times yes. And it’s funny that you mention that. I think Fannie Mae made this change in April of this year. I used to get several emails a month from people saying, ‘I’m on an income-driven plan. My payment is super affordable, [but they] insist on using 1 percent or 2 percent number.’ And now, I didn’t even think about it, I don’t think I’ve gotten a single email about that since then.
SWK: And do you have any concerns that borrowers with heavy student loans might now be able to borrow more with a mortgage in a way that might be risky for them?
BM: Yes and no. Everyone’s financial situation [is] different, and there’s a lot of components to it. But if I’m looking at a borrower who is in a public service field and has no intention of ever leaving that public service field and, therefore, is very confident that they are going to benefit from the public service loan forgiveness program and have the remainder of their debt forgiven after the 10-year time, then I think it’s foolish to not utilize the income-driven plan amounts to look at their mortgage qualification and force them to wait to purchase that home. I think risk there is fairly minimal. But if it is someone who has six figures in student loans, and their income is very low, they are not in a public service field, they don’t have the opportunity for forgiveness except under the 20 or 25-year plan that the income-driven plans offer forgiveness under, it makes me nervous.
The difference between the forgiveness for Public Service Loan Forgiveness and the forgiveness that the consumer gets under the income-driven plans is the tax implications. Public Service Loan Forgiveness is not taxed. The income-driven payment amounts are taxed. So I worry about someone who is allowed to use their income-driven plan to qualify for a mortgage who is going to get forgiveness, but not for 25 years, and then there’s going to be a big tax bomb.
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