• The 3.5 year pause on student loan payments may have helped some borrowers-turned-potential-buyers save for a down payment. 
• Student loan payments will resume this fall and with the SAVE program, many borrowers will see reduced affordability burdens, helping to stay afloat with the higher cost of housing. 
• Student loan debt is just one part of a larger affordability puzzle as consumer debt has also risen as would-be buyers struggle to keep up with inflation.

The pause on student loan repayments over the last three and a half years helped many households weather the pandemic and the high inflation environment that accompanied it. Based on current student loan balances, the typical student loan borrower delayed slightly less than $15,000 in payments as a result of this pause. Housing costs have risen significantly over that same period with mortgage payments on new home loans more than doubling and rents rising about 27%. The money from deferred loan payments helped buffer these sharp increases.

The resumption of student loan payments this fall introduces new challenges when it comes to housing affordability, particularly for many aspiring first-time buyers. In 29 of the 50 largest markets in the US, the median likely student loan borrower would have saved as much on their paused student loans as a 5% down payment on the typical entry level house. As saving for a down payment is a significant hurdle for first-time buyers, this boost could have helped some cross the threshold into homeownership. 

The Saving on a Valuable Education (SAVE) program, which is the replacement repayment structure for the previous income-driven payment plan for student loans, will significantly lower monthly installments for borrowers who choose income-driven payments when loan payments resume this fall. 

A brief summary of the change in the repayment structure includes reducing the income-driven payments to only 5% of discretionary income, versus 10%, setting discretionary income at 225% of the poverty level instead of 150%, and eliminating additional interest as long as minimum payments are being made. 

This means an income-driven repayment for the median likely student loan borrower with the average loan size of around $37,500 will be $245 less per month under the SAVE program. This is a significant reduction, 69%, in monthly student loan payments for borrowers for a likely borrower. [1]

With this reduction in monthly costs, likely student loan borrowers who want to buy a home would see their debt-to-income ratio – DTI, or the share of income spent on monthly debts –  improve. 

Mortgage lenders typically set a cap for borrowers at 36% DTI for conventional mortgages and 43% for FHA mortgages, meaning the sum of all debts – the new monthly mortgage payment, including taxes, insurance, and private mortgage insurance, as well as additional debts like a car payment or a student loan payment – must be less than 36% or 43% of the borrower’s household income. That limit can be met quickly in a market with high home values, high mortgage rates, and compounding existing debts, making affording a home an uphill battle. 

However, the upcoming change for income-driven student loan payments might help tip some households over the affordability fence, giving them enough of a break to qualify for the typical mortgage on an entry level home. 

In six metros (Charlotte, San Antonio, Columbus, Milwaukee, Houston and Buffalo), changing to the SAVE income-driven repayment structure would allow the median likely student loan borrower to land under that 36% DTI threshold after combining their monthly student loan payments and monthly mortgage payment on the typical entry level home in that market (assuming a 5% down payment). Whereas with the current income-driven payments, the typical likely student loan borrower in these metros would have too high of a DTI to qualify for a conventional mortgage. 

All in all – it’s important for student loan borrowers to be prepared to resume their payments this fall, and keep those payments in mind when making housing decisions now. The SAVE program can significantly reduce the burden on many households with student debt, opening up more opportunities and flexibility in their housing journey. 

[1] Likely student loan borrowers in San Jose have high enough incomes that the change in income-driven payments would not change the typical payment made, because those income-based payments would still be higher than the regular monthly payment assuming these are ten year repayment loans. 

Methodology: 

This analysis utilized US Census data from the 2021 American Community Survey. It consists of households with at least one decision maker (household head, spouse of household head, or unmarried partner of household head) who is between the ages of 18-36 who attended at least one year of college. We assumed this population has student loans and is still paying them off. The balance of student loans is taken from the national student loan data system by dividing the total outstanding student loan debt by the number of individual borrowers. The payments made were under the assumption that all loans are on ten year repayment plans, and all households who qualify for income-driven payments are making income-driven payments. The current income-driven payment plans require 10% of discretionary income which is income over 150% of the poverty level for the family size and the minimum monthly payment is $50. The new SAVE program payments include 5% of discretionary income – which is income over 225% of the poverty level – and there is no minimum payment required.