In Bulletin 2017-23, Freddie Mac announced changes to student loans repayment requirements. In their bulletin, they indicated that they believe that the updated requirements for qualifying borrowers with student loan debt support access to credit and provide sellers with a responsible, simplified approach that addresses student loan repayment plans and student loan forgiveness programs offered today.
The following are the changes that were made to the requirements:
For student loans in repayment, for calculating the monthly DTI ratio, use the greater of: (1) The monthly payment amount reported on the credit report, or (2) 0.5% of the original loan balance or (3) outstanding balance as report.
For student loans in deferment or forbearance, use the greater of: (1) The monthly payment amount reported on the credit report, or (2) 1% of the original loan balance or outstanding balance as reported on the credit report, whichever is greater
For student loan in forgiveness, cancellation, discharge and employment-contingent repayment programs, the student loan payment may be excluded from the monthly DTI ratio provided the mortgage file contains documentation that indicates the following: (1) (a) The student loan has ten or less monthly payments remaining until the full balance of the student loan is forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, or (b) The monthly payment on a student loan is deferred or is in forbearance and the full balance of the student loan will be forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid at the end of the deferment or forbearance period AND (2) The Borrower currently meets the requirements for the student loan forgiveness, cancellation, discharge or employment-contingent repayment program, as applicable, and the Seller is not aware of any circumstances that will make the Borrower ineligible in the future
In the bulletin, for each of the changes, Freddie Mac provided their rationale as to why they implemented the changes.
The rationale given for the changes for student loans in repayment is:
- Their current requirements were developed based on traditional student loan repayment plans that provide for fully amortizing monthly payments typically reported on credit reports.
- Their revised requirements continue to permit the use of the reported payments for student loans with fully amortizing monthly payments while also providing a solution for evaluating student loans in income-driven repayment plans.
- Income-driven repayment plans are becoming more prevalent in the market and are subject to annual recertification of the monthly payment amount. By requiring the use of a minimum payment of 0.5% of the original loan balance or outstanding balance, whichever is greater, the risk of the potential payment shock from the monthly payment increasing after the annual recertification is reduced; however, the borrower is still given the benefit of using a lower monthly payment amount than would be required under the traditional fully amortizing repayment plan.
They also simplified their requirements by removing the requirement to obtain documentation if a monthly payment amount is not reported on the credit report.
The rationale given for the changes for student loans in forbearance is:
Using 1% of the original loan balance, if greater, accounts for traditional student loan plans providing for a fixed payment based on the original loan balance.
Using 1% of the outstanding loan balance, if greater, accounts for student loans with an outstanding balance greater than the original balance due to interest that had accrued during a period of forbearance.
These requirements provide a simple approach with no additional documentation needed from the borrower.
The rationale given for the changes for student loan forgiveness, cancellation, discharge and employment-contingent repayment programs is:
- This new provision provides additional flexibility to exclude student loan debt from the monthly DTI ratio when it is likely that student loan payments will no longer be required in the near future, or are not required currently and will not be required in the future.
PRMG has already updated our product profiles in support of these new Freddie Mac requirements.