Tariq Habash was in the market to buy a home in 2016, and he knew there were a couple of factors that the banks would be looking at to figure out whether he would get a loan, for how much, and what the terms would be. There was his credit score, his down payment, and his assets. Then there were his liabilities: credit-card debt, car payments, and student-loan debt. But he found something troubling when lenders were calculating his student-loan debt payments: They were saying he owed a lot more than he actually had to pay.
Why was that? Habash, who was a 25-year-old living in Washington, D.C., at the time, was in an “income-driven repayment” plan, which allows borrowers to pay a reduced amount for their student loans each month based on their income and family size. The mortgage lenders Habash was going to did not look at that lower monthly payment, and instead calculated monthly payments based on the size of his loan.
Habash, a senior policy analyst at the Century Foundation, was ultimately able to work his situation out with lenders, and get a mortgage that was reasonable. But others without his sort of expertise are often stuck unable to get a mortgage. Income-driven repayment plans are meant to help people who might otherwise struggle to repay student-loan debt—mostly people who earn between $20,000 and $60,000, according to Kristen Blagg of the Urban Institute. If a borrower makes regular payments of the agreed-upon amount for 20 to 25 years, based on a specific income-driven repayment plan, the outstanding debt will be forgiven. But lenders did not take the discounted payment amounts into consideration, which at times led to the bank surmising that a borrower had too much debt to be able to make their monthly payments—and ultimately to a mortgage denial.