Policy proposal: Hardship and debt-to-income ratio

Negotiated Rulemaking 2023 - Student Loan Debt Relief

November 14, 2023

Summary 

To target excessively burdened borrowers across the economic spectrum, we propose a new 

hardship program that offers borrowers periodic opportunities to apply for an adjustment to their 

outstanding balance that reduces their debt-to-income (DTI) ratio to a level that would reduce 

hardship.

Proposal: Opportunities for period relief adjustments based upon debt-to-income ratio

To target excessively burdened borrowers across the economic spectrum, we propose a new 

hardship program that offers borrowers periodic opportunities to apply for an adjustment to their 

outstanding balance that reduces their debt-to-income (DTI) ratio to a level that would reduce 

their hardship.

We expect borrowers to pay down their balance over the course of their repayment period, and 

thus, their outstanding balance would decline in relation to their income. One would also expect 

that most borrowers’ incomes would grow over time. When this does not happen then a 

borrower is in hardship. The graduated levels of DTI suggested below to which a borrower could 

have their balance re-adjusted reflect estimates of a reasonable loan balance in relation to a 

borrower’s time in repayment. 

Under this policy, the account adjustments would periodically cancel a portion of a borrower's 

outstanding debt to result in the maximum DTI ratios below:

● 4 years: 85-125% of income

● 8 years: 65-100% of income

● 12 years: 45-75% of income

● 16 years: 25-50% of income

● 20 years: Full cancelation, or 25% of income

Or

● 4 years: 20-40% of income

● 6 years: 40-70% of income

● 12 years: Full cancelation

The maximum DTI levels could also be adjusted to a sliding scale, in which higher-income 

borrowers are expected to manage a higher DTI. This adjustment schedule could also be 

constructed on a 10 or 12-year timeline.
2 

To account for short-term spikes or drops in annual income, borrowers’ eligibility could be 

evaluated based on an average of the annual income earned in each of the 3 years preceding 

the application (excluding periods of in-school deferment and medical residency).

Ideally, this program would be automatic based on income data from tax records; when this is 

not possible, a simple application-based process could be implemented.

Background: Student loan debt and hardship

Student loan debt works as an obstacle to economic mobility and a source of financial difficulty 

for borrowers across the economic spectrum. Despard et al. highlights some key measures of 

hardship that emerge from the academic literature on student debt and economic well-being:

● “Households with student debt obligations fare worse on measures of assets and net 

worth compared to non-indebted counterparts (Elliott & Nam, 2013).”

● “Analyzing data from the Survey of Consumer Finances (SCF), Bricker and Thompson 

(2016) found that households with student debt were 4 percentage points more likely to 

be 60 days late on bill payments and 18% more likely to have been denied credit, or 

feared credit denial, than those without student debt.”

● “Student debt is also associated with increased odds of bankruptcy for some borrowers. 

Using SCF data over a longer time period (1995 to 2010), Gicheva and Thompson 

(2015) found that as the amount of student debt increases, the likelihood of declaring 

bankruptcy increases, even after controlling for income, predicted earnings, and other 

demographic factors. The strength of the relationship between student debt and 

bankruptcy was greater for households with at least one borrower who did not complete 

their degree and decreases, but was still statistically significant, when controlling for 

economic condition in their models (aggregate unemployment and bankruptcy rates). In 

contrast to other research, student debt amount was unrelated to late bill payments or 

credit denials (Gicheva & Thompson, 2015).”

● “Despite wage and earnings premiums long associated with earning a college degree 

(Greenstone & Looney, 2012; Hershbein, Harris, & Kearney, 2014), student debt may 

constrain graduates' investment choices and inhibit the accumulation of assets (Gicheva 

& Thompson, 2015). College-educated households without student debt have seven 

times the net worth of similar households with student debt (Fry, 2014). Retirement 

savings are 52% higher for non-indebted households than indebted ones (Elliott, 

Grinstein-Weiss, & Nam, 2013). Because students borrow against future earnings, 

higher borrowing rates during college reduce the availability of discretionary income to 

build wealth post-college (Elliott & Lewis, 2015). This may be particularly true for recent, 

early-career graduates who are repaying debt while earnings are lower (Hershbein et al., 

2014).”

● “Conventional life-cycle vehicles through which households accumulate assets may also 

be affected by student debt. College graduates with large student debt levels had 

significantly lower odds of purchasing a home than those without outstanding debt 

(Brown & Caldwell, 2013; Brown et al., 2015; Gicheva & Thompson, 2015; Shand, 
3 

2007), which may be due to reluctance to assume more debt (Houle & Berger, 2015). 

These divergent rates of homeownership amount to vastly different short- and long-term 

wealth profiles. Compared to homeowners without student debt, indebted homeowners 

are estimated to have $70,000 less in home equity (Hiltonsmith, 2013).”

● “A small body of evidence has demonstrated that the burden and stress associated with 

student debt may have adverse mental or physical health impacts... Walsemann, 

Ailshire, and Gee (2016) found that higher levels of student debt among Black young 

adults were associated with fewer hours of sleep, though no such relationship was found 

among White and Latino young adults.”

● “Participants with student debt had 51%, 19%, and 27% greater odds of experiencing 

material hardship (p b 0.001), health care hardship (p b 0.05), and financial difficulty (p b 

0.01), respectively, compared to participants with no student debt. Certain demographic 

variables were also associated with outcomes. An increase in one year in age was 

associated with greater odds for healthcare hardship (p b 0.01). Women had 59%, 31%, 

and 31% greater odds than men of experiencing material hardship, health care hardship, 

and financial difficulty. Participants with dependents had 88% and 67% greater odds of 

material hardship, and financial difficulty (both p b 0.001), respectively, compared to 

participants without dependents.”

● “Participants with student debt had greater odds of skipping housing payments, bill 

payments, medical care, dental care, and prescription medications, as well as 

experiencing food insecurity and overdrawing bank accounts.”1

● This study found that participants with student debt had 

○ 51% greater odds of experiencing material hardship (p < 0.001)

○ 19% greater odds of experiencing health care hardship (p < 0.05), and

○ 27% greater odds of experiencing financial difficulty (p < 0.01)

● respectively, compared to participants with no student debt. (12)

Zhan (2020), similarly, found that “Young adults who had student loan debt were more likely to 

experience financial hardships. For example, the young adults who had student loan debt were 

about 0.8 times more likely to have difficulty in paying bills, 1.3 times more likely to have 

financial difficulty in meeting health care needs, and 2.3 times more likely to be late on 

mortgage payment.”2

Frameworks for relief based upon debt-to-income ratio

1 Despard, M. R., Perantie, D., Taylor, S., Grinstein-Weiss, M., Friedline, T., & Raghavan, R. 

(2016). “Student debt and hardship: Evidence from a large sample of low-and moderate-income 

households.” Children and Youth Services Review, 70, 8-18, 

https://www.sciencedirect.com/science/article/abs/pii/S0190740916302705. 2 Zhan, Min. (2020). “Student Loan Debt and Financial Hardship among Young Adults,” International 

Consortium for Social Development,

https://scholar.archive.org/work/4d3g72edb5gljmklg5qa7okuei/access/wayback/https://quod.lib.umich.edu

/cgi/p/pod/dod-idx/student-loan-debt-and-financial-hardship-among-youngadults.pdf?c=sdi;idno=17872073.0042.203;format=pdf. 
4 

Eaton et al. demonstrate that “student debt cancellation—at all proposed levels—is progressive; 

it would provide more benefits to those with fewer economic resources and could play a critical 

role in addressing the racial wealth gap and building the Black middle class. The reason for this 

progressivity is simple: People from wealthy backgrounds (and their parents) rarely use student 

loans to pay for college.”3

Understanding the relationship between debt and income is a standard way to assess debt 

burden. In its 2019 Survey of Consumer Finances analysis, the Federal Reserve uses “three 

measures of debt burdens: leverage ratios, debt-to-income ratios, and payment-to-income 

ratios. Leverage ratios compare debts to assets, debt-to-income ratios compare debt to income, 

and payment-to-income ratios compare payments made on debt relative to income. All three 

ratios can be constructed either in aggregate or as a median for debtors.”4

This proposal recommends using debt-to-income ratio as a means of assessing and alleviating 

student loan debt burden. There is a range of perspectives on what constitutes an “affordable” 

versus an “excessive” debt, and they are generally offered on either a monthly payment-toincome ratio or a total debt-to-annual income ratio. One can also be derived from the other 

based on the interest and payment period. 

Estimates of an affordable monthly payment-to-income threshold generally range from 5-15%, 

with 8% as a level that was generally accepted by scholars for a significant period.5 (The Saving 

on a Valuable Education, or SAVE, income-driven repayment plan, uses 5% of monthly

discretionary income as an affordable level.) 

However, most estimates have historically been based upon mortgage lending practices which 

seek to assess the level at which a borrower is likely to default.6 The level at which a student 

loan borrower experiences hardship may differ from the circumstances that lead someone to 

default on a loan and may correspond to less extreme metrics of financial hardship, such as an 

inability to save for retirement or emergencies. We encourage the Department to think beyond 

extreme hardship (as indicated by measures such as default, delinquency, or reliance upon 

federal benefit) to those that indicate student loans are a financial burden and a barrier to 

economic well-being.

For example, a recent survey of student loan borrowers found that, across generational divides, 

student loan borrowers struggled with this basic level of economic well-being. Below are the 

3 Eaton, C., Goldstein, A., Hamilton, L., & Wherry, F. (2021). “Student Debt Cancellation Is 

Progressive: Correcting Empirical And Conceptual Errors.” Roosevelt Institute, 

https://rooseveltinstitute.org/publications/student-debt-cancellation-is-progressive/. 4 Bhutta et al., (2020). “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of 

Consumer Finances,” Federal Reserve Bulletin, 106, 24, 

https://www.federalreserve.gov/publications/files/scf20.pdf. 5 Baum, S. & Schwartz, S. (2006). “How much Debt is Too Much Debt?” The College Board, 

https://files.eric.ed.gov/fulltext/ED562688.pdf. 6 Ibid.
5 

proportions of those surveyed who delayed the below “significant financial decisions... 

specifically because of the student loan debt for [their own] education.”7

Saving for 

retirement

Saving for 

emergencies

Paying off other 

debt

Gen Z 26% 25% 21%

Millennials 28% 31% 25%

Gen X 26% 28% 24%

Baby boomers 22% 23% 24%

Source: Hanneh Bareham, “Survey: Student loans have delayed wealth-building for Gen Z and 

millennial borrowers,” 2022, Bankrate.com, https://www.bankrate.com/loans/studentloans/financial-milestone-survey-2022/. 

Kantrowitz, who accepts 10% as the threshold for an “affordable” debt-service-to-income ratio, 

shows that a 10-15% monthly payment corresponds roughly to the “rule of thumb” that “total 

student loan debt at graduation should be less than the expected annual starting salary.”8 The 

Texas Higher Education Coordinating Board, in its strategic state plan for higher education 

60x30TX, calls for all students to graduate with less “debt that amount[s] to less than 60% of 

first-year wages.”9 These two threshold levels for overall debt-to-income ratio (between 60% 

and 100% of original principal to first-year salary) upon graduation may be understood as 

general benchmarks the Department could begin at to assess reasonable levels of debt-toincome ratios that could inform hardship debt relief policies.

Conclusion

Reducing excessively burdened borrowers’ DTI ratios will allow them to make progress toward 

paying off their loans and remove what many borrowers experience as an insurmountable 

barrier to economic well-being. It will better allow them to pursue opportunities like 

homeownership, entrepreneurship, and parenthood, while improving their ability to access credit 

while stimulating the wider economy.

7 Hanneh Bareham, “Survey: Student loans have delayed wealth-building for Gen Z and millennial 

borrowers,” 2022, Bankrate.com, https://www.bankrate.com/loans/student-loans/financial-milestonesurvey-2022/. 8 Kantowitz, M. (2015). “Who Graduates with Excessive Loan Debt?” Student Aid Policy Analysis Papers, 

http://www.studentaidpolicy.com/excessive-debt/Excessive-Debt-at-Graduation.pdf. 9 Texas Higher Education Coordinating Board, “2022–2030 Strategic Plan: Building a Talent Strong 

Texas,” https://reportcenter.highered.texas.gov/agency-publication/miscellaneous/building-talent-strongtexas/.