- urban institute informed In March, the share of delinquent student loan borrowers with mortgages also nearly doubled, rising from 8% in 2019 to 15% in 2025.
- The Biden-era rule eliminated the long-standing 1% balance assumption for student loan debt-to-income calculations on FHA loans, allowing underwriters to use the borrower’s actual payments, even $0 payments associated with income-driven repayment plans.
- The result is that student loan borrowers are more likely than the average homeowner to default or default when they resume student loan payments.
“$1,200 a month is crazy and I have 3 kids. How do I pay my mortgage?”
That comment, posted by a borrower who is making $145,000 a year our tiktok videosCatches a problem now visible in federal mortgage data. Homeowners who qualified for an FHA or conventional loan while their student loan debt was foreclosed (many on income-driven plans that allowed $0 monthly payments) are facing larger bills that weren’t factored into the original underwriting math.
The mortgage they were approved for included low or $0 student loan payments. Today, student loan payments are larger, and household budgets also include car loans and loans for children, which cost more than ever.
A driving factor behind this trend comes from a Biden administration policy that weakened federal mortgage underwriting standards in 2021. Fast forward to today and the decision that was supposed to help student loan borrowers is now paying the price.
In June 2021, HUD released bond letter 2021-13 (PDF file), eliminating a long-standing FHA rule that required lenders to count 1% of a borrower’s outstanding student loan balance toward debt-to-income if the borrower did not have a fully amortized payment plan (e.g., the Standard Plan).
Instead, the administration set a much looser standard: use the actual monthly payment from the credit report, or 0.5% of the balance if that payment was $0. Fannie Mae and freddie mac Went a little further, actually allowing a documented $0 payment to count as $0 to qualify in certain circumstances.
This change was introduced in the midst of the federal student loan payment pause, when millions of borrowers had no payments reporting, so millions of potential student loan borrowers were able to qualify for mortgages using this looser standard.
Officials framed the change as expanding access to homeownership for borrowers who have been disadvantaged by student loans. This essentially made the entire FHA approval process based on a payment number that existed only due to emergency executive action and pending litigation.
When the courts struck down the SAVE plan and the moratorium on payments ended, that false pretense ended. There were no hostages.
The rule change that reshaped the borrower math
Before the pandemic, FHA underwriters were required to use the greater of reported credit payments or 1% of the outstanding student loan balance when calculating debt-to-income.
On a $60,000 student loan balance, this means a $600 monthly liability at application, whether or not the borrower actually paid that amount.
HUD’s bond letter 2021-13 Eliminated the 1% assumption. Lenders were instructed to use the actual documented monthly payment, even if the payment was less than the credit report figure. If the documented payment was $0, the lender will assume 0.5% of the amount owed.
However, some underwriters have gone further, allowing borrowers on income-driven repayment plans to qualify with a $0 payment on application, if it can be documented.
The practical effect was that millions of borrowers (particularly first-time buyers with large balances) saw their eligible DTI drop overnight. A borrower who would have been disqualified under the old 1% rule can now exceed the limit and close on a home.
Here’s how some lenders will report student loans on the credit report for a home purchase. Many people do not report the scheduled payment amount.
policy criticism
The flaw in the design was not that lenders were given flexibility. It was that the flexibility was dependent on the status of payments being made by emergency executive action, regulatory rule-making, and ongoing litigation, not how much borrowers would ultimately have to pay.
The SAVE plan, which produced $0 monthly payments for many low-income borrowers, was found unlawful by the Eighth Circuit Court of Appeals in February 2025. The Education Department has indicated that borrowers remaining in related restrictions will have to change plans and resume repayments this summer.
This comes as nearly 12 million federal borrowers are now delinquent or in default, according to federal data summarized in recent reporting. Pay cuts for defaulting borrowers are expected to resume in late 2026.
For mortgage underwriting, the problem is not theoretical. A family approved with a $0 payment on a loan application in 2023 or 2024 may now face actual student loan payments of several hundred dollars per month.
what the data shows
The overlap between student loan and mortgage stress is increasing. Urban Institute’s March 2026 analysis found that of the 6 million student loan borrowers who were delinquent or in default, 15% also had a mortgage — close to double the 8% of borrowers recorded in 2019.
FHA loan performance is also showing strain. FHA-insured mortgage delinquencies reached 11.5% in Q4 2025, compared to 1.8% for conventional loans. mba data.
Nearly 30% of FHA borrowers carry student loan debt (a much higher share than traditional borrowers) and borrowers who are in arrears on student loans are up to 4 times more likely to be in arrears on their mortgage, according to Housing Industry Analysis.
Who is most exposed?
Borrowers most at risk are first-time homebuyers who used FHA financing between 2021 and 2024 while enrolled in an income-driven repayment plan or when their loans were foreclosed. Three conditions matter:
- A high student loan balance relative to income, where the 1% rule would have pushed the DTI over the limit but actual or $0 payments kept it below.
- An FHA loan with a low down payment, which leaves little equity cushion if the family needs to sell under stress.
- SAVE Steps out of forbearance and into a standard or income-driven plan with real monthly payments.
The math has changed for these families. Monthly student loan payments of $400 to $600 that were not in the underwriting model are now competing with mortgage payments, insurance, property taxes and rising utility costs.
The recourse that lenders assumed was realistic in 2021 may not necessarily be realistic today.
what comes next
The Trump administration finalized new student loan rules that will establish repayment assistance plans as the main income-based repayment option for new borrowers in July 2026.
However, not all student loan changes change or eliminate the mortgage underwriting problem. And as more borrowers prepare to resume payments in the coming months, it’s likely that more student loan borrowers with mortgages will be in financial trouble.
Federal regulators have shown no signs of rolling back the loose underwriting standard. The market is, in effect, a live test of whether rules designed for a temporary policy environment can hold up after that environment ends.
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