SAVE Plan Could Create Pathway to Homeownership for Millions of Student Loan Borrowers, New Report Finds

January 24, 2024

Washington, D.C. — Enrolling in the Department of Education’s latest income-driven repayment plan, Saving on A Valuable Education (SAVE), could revive the homeownership dreams of millions of low- and moderate-income student loan borrowers, according to a joint report released today by the Center for Responsible Lending (CRL) and California Policy Lab.

The reduction of monthly debt payments due to SAVE can improve a borrower’s debt-to-income (DTI) ratio (total monthly debts divided by gross income). A lower DTI is a favorable factor for lenders when deciding whether to approve a mortgage loan. However, for the benefits of SAVE to be fully realized, underwriting criteria for federally insured mortgages must reflect actual payments, even if the payment obligation is $0. View CRL’s policy recommendations.

Under SAVE, introduced by the Biden administration last year, payments are based on a borrower’s income and family size. Moreover, the amount of a borrower’s discretionary income that applies to repayment is cut in half, which lowers monthly payments. The plan also prevents unpaid interest from increasing a borrower’s loan balance, and ensures remaining balances are forgiven after a certain number of years.

“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. “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.”

“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. “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.”

Key findings of the report include:

The SAVE plan carries the potential to significantly reduce the monthly payments of current IDR borrowers, potentially lowering them from $197 to $69.
Borrowers who are actively making monthly payments would experience a DTI ratio reduction of 1.5% to 3.6% by enrolling in SAVE.
If the Federal Housing Administration (FHA) adopts underwriting criteria similar to Fannie Mae by counting $0 payments, borrowers with $0 payments could see their DTI decrease by between 3.8% to 7.1%.

CRL policy recommendations include requiring federal agencies that offer mortgage loans and government-sponsored enterprises to adopt underwriting criteria that reflect borrowers’ payment obligations under SAVE, even if the payment obligation is $0, if the amount is reported on a borrower’s credit report or otherwise verified by a student loan servicer. Moreover, CRL recommends ensuring that these policy changes are applied to existing laws and encourages public and private lenders to apply such changes.

CRL’s analysis indicates that of the current 6.9 million borrowers enrolled in SAVE, approximately 3.9 million, including 3.4 million renters, are eligible for $0 payments. This eligibility could potentially enable prospective homebuyers to qualify for a federally guaranteed or federally supported mortgage. CRL believes that the number of eligible borrowers is significantly higher, given that the SAVE program increases the number of borrowers eligible for $0 repayments.