Take a Loan Off Fannie (Mae): Student Debt and Mortgage Underwriting Constraints

• In Event: Housing and Human Capital

Abstract

Student loan debt has risen sharply over the past two decades and now constitutes a substantial share of household liabilities in the United States. Over the same period, gaps in homeownership have widened, and individuals who have held student debt are significantly less likely to transition into homeownership by middle age. This paper examines how mortgage underwriting rules shape access to homeownership for potential homebuyers with student debt, with a particular focus on the role of payment-based constraints.

We exploit 2017 policy changes by Fannie Mae and Freddie Mac that altered how student loan obligations are incorporated into debt-to-income (DTI) calculations. Prior to the reform, lenders often imputed student loan payments using a fixed percentage of outstanding balances, regardless of actual repayment terms. The policy change allowed lenders to instead use realized payments under Income-Driven Repayment (IDR) plans, which are typically lower and vary with income. This reform provides a natural setting to study how underwriting rules translate student debt burdens into borrowing constraints.

Using individual-level credit bureau and mortgage servicing data from the Federal Reserve Bank of Philadelphia’s Consumer Credit Panel (CRISM–CCP), we implement difference-in-differences and triple-differences research designs. Our primary comparison contrasts potential homebuyers with student loans enrolled in IDR plans with those in standard repayment plans, alongside broader comparisons between individuals with and without student debt. These designs isolate how the relaxation of DTI constraints differentially affects mortgage access and housing outcomes across borrower types.

To interpret these empirical findings, we develop a structural lifecycle model of housing, borrowing, and default in an incomplete markets environment. The model incorporates key mortgage underwriting constraints, including DTI and loan-to-value (LTV) limits, and allows student loan obligations to affect borrowing capacity through both required payments and balance sheet dynamics. Within this framework, student debt acts as a wedge that limits down payment accumulation and tightens mortgage eligibility.We find that potential homebuyers with student debt are disproportionately constrained by DTI limits, and that relaxing how payments are measured meaningfully expands access to mortgage credit. These results highlight how the design of repayment contracts and underwriting rules jointly determine entry onto the housing ladder and subsequent wealth accumulation.

Author

• Kelcie Ferrara-Gerson, University of Michigan
  Presenting Author