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The demise of the Biden administration’s plan to forgive roughly $430 billion in student loan debt could make it harder for millions of would-be homebuyers to save up for a down payment and qualify for a mortgage.

But the government will continue to offer income-driven repayment programs that can make monthly student loan payments more affordable and, in some cases, offer even more loan forgiveness.

In a 6-3 decision Friday, the Supreme Court ruled that the Biden administration’s plan to provide up to $20,000 in blanket student loan forgiveness to borrowers meeting income requirements amounted to “seizing the power” of Congress, exceeding emergency powers granted to the executive branch during emergencies like the Covid-19 pandemic by the HEROES Act.

The Biden administration had expected more than 40 million borrowers would qualify for up to $10,000 in forgiveness, with Pell Grant recipients eligible for an additional $10,000 in relief. The Congressional Budget Office has estimated that about $430 billion of the $1.6 trillion in federal student loan debt held by 43 million borrowers would be forgiven, with about 95 percent of those borrowers meeting income eligibility requirements.

The U.S. Department of Education had already approved forgiveness for 16 million borrowers but suspended that relief last fall pending the outcome of court challenges.

“The hypocrisy of Republican elected officials is stunning,” President Joe Biden said in a statement on the Supreme Court’s decision. “They had no problem with billions in pandemic-related loans to businesses – including hundreds of thousands and in some cases millions of dollars for their own businesses. And those loans were forgiven.”

Saying the “fight is not over,” the Biden administration announced it would seek an “alternative path to debt relief for as many borrowers as possible, using the Secretary of Education’s authority under the Higher Education Act.”

The Job Creators Network Foundation (JCNF), a conservative group that filed one of the court challenges of the Biden administration’s student loan forgiveness plan, called the decision “a great victory for [JCNF], the Constitution, and the American people.”

“We brought this case on behalf of two plaintiffs, and we’re pleased the ruling stops one of the most egregious examples of executive overreach in modern American history,” JCNF President Elaine Parker said in a statement. “It sets the stage for long overdue bipartisan action to address the underlying reason for the student debt crisis: Unaccountable colleges that have raised tuition by more than double the inflation rate over the last generation.”

Student loan payments set to resume

Payments on federal student loans that were paused during the pandemic are set to resume in October, as part of a deal the Biden administration made with Republicans in May to raise the national debt ceiling (the Department of Education will provide a 12-month “on-ramp” so that financially vulnerable borrowers who miss payments won’t be reported to credit bureaus).

So the money that student loan borrowers might have socked away for a down payment on a house will now go to the government instead.

Zillow economist Nicole Bachaud noted that at more than $300 a month, the typical student loan payment is about what the average home shopper is able to save for a down payment each month.

“Younger buyers are already struggling to save up a down payment, paying a substantial part of their income to quickly rising rent,” Bachaud said in a statement. “Pausing student loan payments for three-and-a-half years gave many the financial breathing room to weather rising inflation, pay off other debts, or perhaps save for a down payment.”

Homebuyers can find programs that provide down payment assistance using services like Down Payment Resource, which makes information about programs and eligibility requirements available through sites like Zillow and Redfin, as well as through integrations with multiple listing services (MLSs), lenders and agents.

But monthly student loan payments can also increase a would-be homebuyer’s debt-to-income (DTI) ratio, making it harder to qualify for a mortgage.

Options for lowering monthly payments

The Department of Education’s office of Federal Student Aid currently offers a number of student loan repayment plans, including income-driven repayment (IDR) plans that allow borrowers to limit their monthly student payments equal to no more than 10 to 15 percent of their discretionary income.

The Biden administration says when rolled out next year, its proposed “SAVE” plan will cut the minimum monthly payment for undergraduate loans to 5 percent of discretionary income, and change to formula for calculating discretionary income to help borrrowers pay for essentials like food and rent.

While existing IDR plans can help would-be homebuyers save up for down payments or qualify for mortgages, the monthly payment may make only a small dent in their student loan balances. For that reason, borrowers in IDR plans can qualify for loan forgiveness after 10, 20 or 25 years of payments.

More than 3.6 million borrowers with federal direct loans who were enrolled in IDR plans will receive at least three years of credit toward loan forgiveness even if they weren’t making payments during the pandemic. Unlike the Biden administration’s plan to provide up to $20,000 in loan forgiveness, there’s no cap to loan forgiveness in an IDR plan. Law school, medical school and other graduate degree holders who often graduate with more than $100,000 in student loan debt may qualify to have much of it forgiven.

Loan forgiveness can have tax implications, but the most generous program – Public Service Loan Forgiveness – provides tax-free loan forgiveness after just 10 years of payments to teachers and others employed by the government or nonprofit organizations. Last month, the Department of Education announced it had approved $42 billion in Public Service Loan Forgiveness for more than 615,000 borrowers since October 2021.

For student loan borrowers who are enrolled in an IDR plan and looking to qualify for a mortgage, the impact of their student loans payments on DTI depends on what type of loan they’re seeking. The rules for calculating the impact on DTI depend on whether the loan is backed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (VA).

In relaxing its underwriting requirements for student loan borrowers enrolled in IDR plans at the outset of the pandemic, the FHA estimated that more than 80 percent of the mortgages it insures are taken out by first-time homebuyers and 45 percent of those borrowers also have student loan debt.

Editor’s note: This story has been updated with additional details about the Biden administration’s proposed income-driven repayment plan, “SAVE.”

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Email Matt Carter

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