I am working on packaging a 502 loan application that has significant student loan debt but the applicant is on an Income Driven Repayment Plan, how do I handle this in my Total Debt (TD) calculations? Do I still use 1 percent of the total balance or can I use the income driven amount?

Driven to Confusion

Dear Driven to Confusion,

Both can come into play but which one is used depends on whether the applicant’s student loan is in deferment or repayment status. If her/his loan is in repayment status, you use the actual monthly payment under the existing repayment plan (as verified by the lender) if the following four conditions are met:

  1. The loan is in repayment status
  2. The applicant has a reliable credit score of 640 or higher
  3. The applicant has no significant delinquency
  4. The applicant’s payment shock is not more than 100 percent or is not measurable

If all four conditions are met and the applicant who is responsible for the student loan has, for example, a $0 monthly payment because they are on an income-driven repayment plan, there will be no student loan payment considered in the TD ratio. If all but the fourth condition is met, a waiver from the next level supervisor may be sought if the overall risk assessment on the application warrants it.

If your applicant’s student loan is currently in deferment or forbearance, the higher of the monthly student loan payment listed on the credit report or 1 percent of the student loan balance must be used in the TD ratio.

Sincerely, Sher

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