Student loans

Canceling student loans may not be the magic bullet to boost home ownership.

Buying a house

“The sad truth is that it will do little to turn the dial for potential home buyers.”


One of the main political talking points amid all the lobbying for student loan forgiveness was that by reducing debt for heavily burdened millennials and Gen Zs, it would free up money for the home ownership.

Now that some degree of student loan forgiveness, barring any court freezes, seems on track, housing economists aren’t exactly expecting a flood of millennial buyers. and Generation Z that weren’t already on the market.

“The sad truth is that this will be little game-changer for potential buyers,” said Ally Braun, spokesperson for Redfin.

The Biden administration announced in August a plan to eliminate up to $10,000 in federal student loan debt for non-Pell Grant recipients earning less than $125,000. Recipients of Pell Grants (a type of financial aid for undergraduate students with “exceptional financial need,” according to the Department of Education) at the same income threshold are eligible for up to $20,000.

Applications are open for this relief, but an appeals court decision has temporarily blocked the initiative. But even if, or when, the measure resumes, experts say it is unlikely to trigger a wave of home purchases by these generational cohorts.

After all, the government suspended federal student loan payments during the pandemic and continues to do so. This means that these payments have not been a financial factor for many borrowers for over two years.

“For many people, your monthly budget – once your loans are canceled, or $10,000 of the loans are canceled – may not be much different than it is now, [especially] if you didn’t factor those payments into your current spending,” said Nicole Bachaud, senior economist at Zillow.

Data shows that the heavy burden of student debt is keeping more people in rental housing. A 2021 National Association of Realtors Survey reported that 51% of borrowers surveyed postponed or delayed buying a home because of a student loan. In the Northeast, this number was much higher (61%).

The debt-to-income ratio greatly affects how lenders determine whether someone qualifies for a mortgage. This ratio for a borrower tells the lender how much additional debt that person can incur.

Biden’s student loan forgiveness plan — even in the current proposal, which is less than what Sen. Elizabeth Warren, Democrat of Massachusetts, and Rep. Ayanna Pressley, Democrat of Massachusetts, wanted: up to $50,000 ) – would help borrowers with a higher debt-to-income ratio.

“When we look at overall debt balances and debt-to-income ratios and how people are going to be able to afford a mortgage in the future, having no student loan debt is going to open up a bit more headroom. maneuvering and breathing space for potential buyers looking to find ways to qualify for a mortgage,” said Bachaud.

But it is still too early to determine the exact impact on homeownership rates.

Credit scores determine mortgage eligibility as well as interest rates. It’s unclear whether canceling student loan debt at $10,000 or $20,000 would boost them.

It might even lower them, depending on how the figure is calculated, because writing off a borrower’s debt might eliminate a line of credit.

Will it improve people’s credit scores overall? “The answer is nobody knows,” Bachaud said. “For each person, the answer is going to be different. … It’s certainly not an avenue that would likely be the primary driver of improving affordability or making people mortgage ready.

It may be too early to speculate on the extent of student loan forgiveness in the housing market beyond lowering monthly loan payments and freeing up cash. But housing affordability is unlikely to be a by-product of the program, housing experts said.

Zillow does not foresee a massive drop in home prices nationwide due to an influx of people into the market, Bachaud said. When more people leave the sidelines and enter the housing market, this puts pressure on prices to rise.

Rather than focusing on forgiving student loans, potential home buyers may want to consider other options. Braun, at Redfin, noted that Fannie Mae, Freddie Mac and the Federal Housing Administration — some of the federal institutions that support mortgages — have programs to ease the strain on borrowers who have heavy student loan debt.

These programs, which may be more tailored to a person’s income and place less emphasis on a borrower’s overall student loan debt, particularly benefit someone who may have an outstanding loan balance of over $75,000. $,” Braun said. This is assistance over $10,000 in loan forgiveness.

“If set up, the new [student loan forgiveness] the policy is good, but it will not change the outcome for borrowers who previously could not qualify,” she added.

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