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Shrinking Student Loan Balances – Homeownership Boon or Economic Disaster?

The US administration recently cut $10,000 from each federal government student loan balancewhich is great news for some – and, for others – the end of civilization as we know it.

This controversial decision certainly rocked the boat, bringing many young adults closer to home ownership. But at what cost to the wider economy?

Like any other type of debt, student loan debt is incompatible with qualifying for a mortgage because it overburdens household life. debt-to-income ratio (DTI).

Most lenders allow DTIs of no more than 31% at front end (including the mortgage) and 43% on back end (all debts included).

But unlike other common debts, such as car or credit card loans, student debt balances tend to be much higher – and the repayment schedule is significant, often 10 to 20 years after the loan. graduation or withdrawal from school.

So, for many college graduates, having student debt is a lot like paying off a mortgage – only, at the same time, paying rent. Without disposable income to set aside to save for a advance paymentstudent borrowers unable to rely on windfalls like family gifts are forced to delay home ownership.

Admittedly, a university degree allows households to earn higher income. The average college graduate earns twice as much money over a lifetime as the average high school graduate, according to the National Center for Education Statistics (NCES).

However, the average bachelor’s degree holder leaves school with federal student loans totaling a whopping:

  • $26,100 for public colleges;
  • $29,000 for private nonprofit colleges; and
  • $35,700 for private for-profit colleges, according to NCES.

For many, their totals are much higher, with 21% of student borrowers owing $50,000 or more, including 2% of borrowers owing more than $200,000, according to the Federal Reserve Bank of New York.

As the cost of education has risen sharply in recent decades, with about two-thirds of university graduates borrowing money to complete their studies. By racial/ethnic group, the largest share of student borrowers are black and Latino students.

Older readers may be scratching their heads trying to figure out why they were able to pay for their education without taking out loans, but the current generation of college graduates is saddled with huge debts.

Consider 1970, when the average annual tuition, fees, room and board was just $10,900 (in 2020 dollars).

In 2020, that cost more than doubled, to $25,900, according to NCES. Again, this figure includes adjustments for inflation. College is just more expensive.

In addition, over the years, the US government has funded the college education of many young people. The most significant example has been through the IG invoice, passed in 1944. This bill provides education for service members, as well as loan guarantees for homes and businesses. After World War II, students attending school on the GI Bill compound half of all college students. Today, the share of students attending the school on the GI Bill is only 1% of all students.

Biden’s debt relief plan

While full details have yet to emerge, the administration’s announcement to forgive large amounts of student debt includes:

  • forgive until $10,000 for federal borrowers whose household income does not exceed $250,000;
  • forgive until $20,000 for Pell Grant recipients, who come from low-income households;
  • reduce monthly payments income-based repayment plansfor undergraduate loans only, from 10% of income to 5%;
  • manufacturing forgiveness of public service debt easier to access;
  • increase the number and dollar amounts of Pell Grants available, which do not need to be repaid;
  • work to do community colleges free; and
  • resume student loan repayments, which were suspended during the pandemicin January 2023, according to the White House.

For eligible borrowers who currently owe less than $10,000, the balance reduction will completely cancel their loans. This is especially true for borrowers whose loans have already been reduced due to years of paying down their balances before the pandemic-induced pause.

Is it okay sudden windfall skyrocket the number of eligible buyers – or even contribute further to the dangerously high inflation rate of 2022?

Not likely.

Every person with federal student loans got their monthly payment pending since April 2020. In other words, they pay zero dollars every month on their student loans. Therefore, even though the new plan will result in a lower monthly payment than before the pandemic, compared to what they have paid in the last two and a half years, it will be an additional bill to pay. from in January, when loan repayments resume.

So this reduction in loan balances is not so much a boon as a nod and a shrug of the shoulders to the overall problem.

Either way, student borrowers with remaining balances will end up paying more in the months or years ahead than they have in the past two and a half years. They may end up spending less than they would have had loan balances not been reduced. But spending more than today – or, for that matter, any time since 2020, when they also had access to individual stimulus checks?

There’s no way.

Related article:

Now spent, stimulus payments leave no lasting impact for households

On the other hand, what about those who will see their remaining balances written off thanks to this debt reduction, will they now be able to become buyers?

It’s possible. But to what end, when interest rates have reduced the purchasing power of buyers, the volume of home sales is slowing and consumers feel the recession coming on the wind?

Anyone buying today is not doing so as a savvy investor. Home prices have peaked, and once they begin to fall seriously, home buyers will pull back completely until the recession is over and prices have bottomed out.

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