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FAQs: Student Loan Debt Requirements

Student Loan Debt Requirements: Scenarios and FAQs

To support our customers in understanding student loan requirements, see below for scenarios and FAQs related to the following student loan topics:
  • Student Loans in Deferment or ForbearanceIncludes scenarios related to: student loans in COVID-related automatic forbearance, student loans in deferment or forbearance, multiple student loans in forbearance, previous payment before automatic loan forbearance, credit report reflects income-based repayment.
  • Student Loan Payment CalculationIncludes scenarios related to: credit report reflects $0 payment or is missing, confusion with credit report payment compared to outstanding loan balance, multiple student loans and repayment terms unknown, credit report does not reflect correct payment, less than 10 months payments remaining, student loan forgiveness, cancellation, or discharge.
  • Income-driven and Graduated Payment Plans. Includes scenarios related to: Student loan on income-driven repayment (IDR) plan, income-driven payment plan is expiring, graduated payment plan is changing, income-driven payment plan shows $0 on the credit report.  
  • Derogatory Student Loan DebtIncludes scenarios related to: student loan is in collection or garnishment, student loan is past due.  
  • Student Loan Debt Paid by OthersIncludes scenarios related to: excluding student loan debt paid by others, partial student loan debt paid by others.
  • Student Loan Cash-Out Refinance OptionIncludes scenarios related to: paying off a student loan with a cash-out refinance option, ensuring student loan(s) are paid in full at closing, DU instructions for paying off a student loan, Texas Section 50(a)(6) loans, general technical considerations for a student loan cash-out refinance option. 

 

Student Loans in Deferment or Forbearance

Scenario: Student loan in COVID-related automatic forbearance.
  1. If the borrower has a federal student loan that is in a COVID-related automatic forbearance, can the monthly payment be excluded from the borrower’s DTI ratio if it has been paid by another party?

In accordance with B3-6-05, Monthly Debt Obligations, non-mortgage debts paid by others can be excluded from the borrower’s DTI ratio with documented evidence that the other party has been making the payments for at least 12 months and the payment history indicates there are no delinquencies.

Given that many student loans were placed into an automatic forbearance status and the other party may have missed payments due to the forbearance, we will allow exclusion of the monthly student loan payment if:

  • the missed payments are resolved by the responsible party (not the borrower) prior to closing of the new mortgage loan;
  • the responsible party had been making payments on the student loan for at least nine months prior to the automatic forbearance;
  • the lender provides borrower documentation evidencing the student loan is in a COVID-related automatic forbearance, and any missed payments have been paid; and
  • all other Selling Guide requirements have been met (for example, evidence of 12 total payments, either monthly or in aggregate, on the omitted debt).
Scenario: Student loan in deferment or forbearance. 
  1. If a student loan is in deferment or forbearance, can the payment amount be excluded for qualifying?

No, payments in deferment or forbearance may not be excluded for qualifying. If the student loan is in deferment or forbearance and the credit report payment amount is missing (or $0), lenders must calculate a qualifying payment by either using 1% of the outstanding student loan balance or a fully amortizing payment using the documented loan repayment terms. Additionally, if the student loan is in deferment or forbearance and the credit report reflects a monthly payment (even if this payment is an estimated payment amount), lenders may use this payment to qualify the borrower.  For details on the various repayment options for federal student loans, including definitions of deferment and forbearance, see https://studentaid.ed.gov/sa/repay-loans.  

Scenario: Multiple student loans in forbearance. 
  1. If a borrower has multiple student loans in deferment or forbearance, should these payments be calculated separately or combined?  

For deferred student loans or student loans in forbearance, the lender may calculate

  • a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
  • a fully amortizing payment using the documented loan repayment terms.

Additionally, if a borrower has more than one student loan, the lender may combine the unpaid principal balances of all student loans to estimate or calculate the total qualifying payment. 

Scenario: Previous payment before automatic loan forbearance. Credit report reflects income-based repayment.
  1. How should I treat non-mortgage debt (for example, student loans, auto loans, etc.) currently in forbearance or deferment?  

Regardless of whether the forbearance or deferment is related to COVID-19, lenders must consider the monthly debt payment in the borrower’s DTI.  For mortgage loans underwritten using DU, DU will provide guidance on the treatment of the debt, and lenders do not need to conduct additional analysis.  For mortgage loans that are manually underwritten, lenders must follow  B3-5.3-02, Payment History. However, lenders are not required to, and should not, consider payments missed during the time of a COVID-19-related forbearance to be historical delinquencies or derogatory credit. 

For student loans, if the monthly payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must either calculate a qualifying payment per B3-6-05, Monthly Debt Obligations, or use the most recent income-driven repayment plan payment (with supporting documentation).

 

Student Loan Payment Calculation

Scenario: Credit report reflects $0 payment or is missing. Confusion with credit report payment compared to outstanding loan balance.
  1. What is the policy on student loan payments?

If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the student loan documentation (the most recent student loan statement) to qualify the borrower.

If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must determine the qualifying monthly payment using one of the options below.

  • If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.
  • For deferred loans or loans in forbearance, the lender may calculate
    • a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
    • a fully amortizing payment using the documented loan repayment terms.
Scenario: Borrower has multiple student loans and repayment terms are unknown. 
  1. Are lenders allowed to manually calculate an estimated student loan payment when the repayment terms are unknown?

Yes. If the repayment terms are unknown, lenders have the option to either estimate a 1% (of unpaid principal balance) payment or, calculate a fully amortizing payment based on the current prevailing student loan interest rate and the allowable repayment period shown in the table below.

Additionally, if a borrower has more than one student loan, the lender may combine the unpaid principal balances of all student loans to estimate or calculate the total qualifying payment.

The “current prevailing student loan interest rate” can be found on a variety of websites. For example, see the U.S. Department of Education Federal Student Aid website. The table below specifies the repayment period to be used when calculating a fully amortizing payment.

Calculating a Student Loan Repayment
Total outstanding balance of all student loans Repayment period
$1 — $7,499 10 years
$7,500 — $9,999 12 years
$10,000 — $19,999 15 years
$20,000 — $39,999 20 years
$40,000 — $59,999 25 years
$60,000 30 years

Example of Calculating an Amortizing Payment: 

Balance: $17,500; Repayment period: 15 years; Interest rate: 4.29%; Monthly Amortizing Payment: $132.00

Scenario: Credit report does not reflect correct payment.
  1. What if the credit report does not reflect the correct student loan monthly payment and there is documentation in the file to support a different monthly payment?

If a lender has student loan documentation in the file (i.e., most recent student loan statement), evidencing a different monthly payment than the credit report, the lender may use that alternative documentation to support the correct monthly payment amount. 

Scenario: Less than 10 months payments remaining.
  1. What are the requirements for installment debt?

All installment debt that is not secured by a financial asset—including student loans, automobile loans, personal loans, and timeshares—must be considered part of the borrower’s recurring monthly debt obligations if there are more than ten monthly payments remaining. However, an installment debt with fewer monthly payments remaining also should be considered as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. 

Scenario: Student loan forgiveness, cancellation, or discharge.
  1. Can a student loan be excluded from the DTI ratio if it was forgiven, canceled, or discharged?

Yes, only if the debt has been fully forgiven as of the closing date of the mortgage loan. The lender must provide supporting documentation to show the loan was forgiven in full and no payments are owed from the borrower.

 

Income-Driven and Graduated Payment Plans

Scenario: Student loan on income-driven repayment (IDR) plan.
  1. What is the policy on income-driven repayment plans for student loans?

For student loans associated with an income-driven repayment (IDR) plan, the student loan payment, as listed on the credit report, is the actual payment the borrower is making and that payment should be used in qualifying. Any future increases in the IDR payment will be tied to similar increases in the student’s income, mitigating concerns that IDR payments may create payment shock.

Scenario: Income-driven payment plan is expiring. Graduated payment plan is changing.
  1. For student loans in an income-driven repayment plan or graduated repayment plan, do I need to consider the expiration date when determining the qualifying payment?

As long as the payment plan is still in effect as of the date of the mortgage loan closing, the lender may use the current monthly payment from the repayment plan in qualifying. 

Scenario: Income-driven payment plan shows $0 on the credit report.  
  1. How are student loan payments calculated if the monthly income-driven repayment plan is $0?

As long as the lender can provide documentation showing the IDR payment is $0, they can qualify the borrower with $0 for the monthly qualifying payment. 

 

Derogatory Student Loan Debt

Scenario: Student loan is in collection or garnishment.
  1. Are there separate requirements for student loans that are in collection or garnishment, versus other debt types?

No. Student loans follow the same guidance as other non-mortgage debt when in collection or garnishment.  Lenders must comply with B3-6-07, Debts Paid Off At or Prior to Closing and B3-6-05, Monthly Debt Obligations, Garnishments.  If the borrower discloses he/she is making monthly payments on a collection account (student loan or otherwise), the lender should include the monthly payment in the debt-to-income ratio.

Scenario: Student loan is past due.
  1. What does DU require for student loans with past due amounts?

Accounts that are reported as past due (not reported as collection accounts) must be brought current.  For additional information, see B3-5.3-09, DU Credit Report Analysis.

 

Student Loans Debt Paid by Others

Scenario: Excluding student loan debt paid by others.
  1. For student loan debts paid by others, what evidence needs to be provided?

Lenders must obtain the most recent 12 months’ cancelled checks (or bank statements evidencing 12 months payments) from the party paying the debt. Additionally, lenders must ascertain that there is not a history of delinquent payments for that debt.

Scenario: Partial student loan payment paid by others.
  1. If someone else pays only a portion of the non-mortgage debt, is all of the non-mortgage debt excluded in the DTI ratio, or is it only the portion that is paid by another?

In order for the debt to be excluded from the DTI ratio, the other party has to pay the complete monthly obligation every month for a minimum of 12 months.

 

Student Loans Cash-Out Refinance Option

Scenario: Paying off a student loan with a cash-out refinance option.
  1. What is the student loan cash-out refinance option?

The student loan cash-out refinance offers simpler eligibility terms and reduced fees designed to provide additional options for borrowers with student debt. This option is available only for loans underwritten through Desktop Underwriter (DU). The maximum loan-to-value (LTV) ratios for the student loan cash-out refinance offering align with those for our standard cash-cut refinance. Refer to the Eligibility Matrix for details.

  1. What are the requirements for a student loan cash-out refinance?

The student loan cash-out refinance feature allows for the payoff of student loan debt through the refinance transaction with a waiver of the cash-out refinance LLPA if all of the following requirements are met:

Requirements for Student Loan Cash-out Refinances
  The loan must be underwritten in DU. DU cannot specifically identify these transactions, but will issue a message when it appears that only subject property liens and student loans are marked paid by closing. The message will remind lenders about certain requirements below; however, the lender must confirm the loan meets all of the requirements outside of DU.
  The standard cash-out refinance LTV, CLTV, and HCLTV ratios apply per the Eligibility Matrix.
  At least one student loan must be paid off with proceeds from the subject transaction with the following criteria:
  • proceeds must be paid directly to the student loan servicer at closing;
  • at least one borrower must be obligated on the student loan(s) being paid off, and
  • the student loan must be paid in full - partial payments are not permitted.
  The transaction may also be used to pay off one of the following:
  • an existing first mortgage loan (including an existing HELOC in first-lien position); or
  • a single-closing construction-to-permanent loan to pay for construction costs to build the home, which may include paying off an existing lot lien.
  Only subordinate liens used to purchase the property may be paid off and included in the new mortgage. Exceptions are allowed for paying off a PACE loan or other debt (secured or unsecured) that was used solely for energy improvements (see B5-3.4-01, Property Assessed Clean Energy Loans and B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties for additional information).
  The transaction may be used to finance the payment of closing costs, points, and prepaid items. With the exception of real estate taxes that are more than 60 days delinquent, the borrower can include real estate taxes in the new loan amount as long as an escrow account is established, subject to applicable law or regulation.
  The borrower may receive cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000. The lender may also refund the borrower for the overpayment of fees and charges due to federal or state laws or regulations, or apply a principal curtailment (see B2-1.3-02, Limited Cash-Out Refinance Transactions for additional information).
  Unless otherwise stated, all other standard cash-out refinance requirements apply.

Delivery Requirements

Loans qualified as student loan cash-out refinances must be delivered to Fannie Mae with Special Feature Code (SFC) 003 and SFC 841. For additional information, see B2-1.3-03, Cash-Out Refinance Transactions.

Scenario: Partial student loan debt pay-off with cash-out refinance option.
  1. Can part of a student loan debt be paid off with the cash-out refinance option?

No, borrowers may not partially pay down a student loan. Student loan(s) must be paid in full with the transaction. No other debts can be paid except PACE (Property Assessed Clean Energy) loans. For additional information, see B2-1.3-03, Cash-Out Refinance Transactions.

Scenario: Ensuring student loan(s) are paid in full at closing.
  1. How can I ensure that student loans are paid in full for a student loan cash-out refinance?

As noted in B2-1.3-03, Cash-Out Refinances Transactions, when the cash-out transaction is used to pay off existing student loans, at least one student loan must be paid off in full with the proceeds.  Additionally, the borrower may receive cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000.  In order to ensure that at least one student loan is paid in full and to comply with these requirements, it is recommended that a payoff statement be obtained from the student loan servicer to ensure the correct loan amount (including any interest and fees) is used in underwriting the loan file.  Additionally, another best practice is to provide clear student loan payoff instructions to the closing agent advising that at least one student loan must be paid off in full, including the loan servicer name and respective account number of the applicable account(s), and instruct the closing agent to include the account number(s) on the disbursement check(s) to the student loan servicer to ensure at least one student loan is paid off in full with the refinance transaction. 

Scenario: DU instructions for paying off a student loan.
  1. How does DU determine if an installment loan being paid off with the cash-out refinance transaction is a student loan?

    In order for DU to know that the installment loan marked Paid By Close in the liabilities section of the DU loan application is a student loan, it would need to be matched to an account on the credit report that is reported as a student loan. DU does this matching using the account number. To ensure that DU can match the liabilities, the account number on the DU loan application and the account number on the credit report need to match. If the matching account is not reported as a student loan on the credit report (does not reflect an account type of Student or Education Loan), DU will not issue the message referencing SFC 841, but lenders can still deliver SFC 841 if the loan complies with the guidelines.

Scenario: Texas Section 50(a)(6) loans.
  1. Are Texas Section 50(a)(6) loans eligible under the student loan cash-out refinance offering?

    The student loan cash-out refinance offering does not prohibit Texas Section 50(a)(6) loans. However, lenders must determine whether the loan complies with Article XVI, Section 50(a)(6). See Selling Guide section B5-4.1-01, General Requirements of Texas Section 50(a)(6) Loans for details.

Scenario: General Technical Considerations
  1. Are there any technical considerations for a student loan cash-out refinance?

    Student Loan Cash-Out Refinance transactions must be delivered to Fannie Mae with Special Feature Code (SFC) 841. Many loan origination systems (LOSs) allow users to create SFCs as needed. In addition, the lender’s or LOS’s proprietary or third-party product and pricing engine (PPE) would need to reflect the waiver of the COR loan-level price adjustment (LLPA). Making that update to a PPE may involve creating a new product or making other adjustments, which may require coding.

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