Mortgage Risk and Disparate Impact Associated With Student Debt

Kevin A. Park
Joshua J. Miller
U.S. Department of Housing and Urban Development

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the U.S. Government. This work was authored as part of the authors’ official duties as employees of the U.S. Government and is therefore a work of the U.S. Government. In accordance with 17 USC 105, no copyright protection is available for such works under U.S. Law. The U.S. Government is granting a nonexclusive license to publish the article.

Student debt payments represent a barrier to homeownership because student loan debt increases the difficulty in qualifying for a mortgage and decreases the amount of income available to sustain homeownership. Yet student loans are different from other types of debt, such as automobile loans and credit card debt, because student loans represent a direct investment in human capital, and higher educational attainment is associated with higher lifetime earnings. To explore the effect of student loan debt in mortgage performance, the authors disaggregate the back-end debt-to-income ratio commonly used in mortgage underwriting into payments on mortgage, student debt, and other debt. The authors find that the presence of student debt is associated with a lower risk of mortgage default, all else equal. However, while disaggregating debt ratios improves the ability to assess default risk and could expand overall access to credit, it also increases the disparate impact on most non-White borrowers.