President Biden announced Wednesday the cancellation of up to $20,000 in student loan debt for individual Americans.
Biden’s policy will cancel $10,000 in federal student debt for borrowers earning less than $125K per year. Americans who paid for college with Pell Grants, available to lower-income borrowers, can qualify for an extra $10,000 in debt relief.
As an agent, you need to know how this decision will affect your individual clients and how it’s likely to impact the housing market as a whole.
The weight of student loan debt on potential homebuyers
Today’s market already bears a financial burden on many homeowners. Student loan debt has made it more difficult for homebuyers, especially Millennial and Gen Z buyers, to enter the real estate market.
At least a third (34%) of Americans aged 18 to 29 have student debt. And the latest figures put the total number of Americans with student debt just above 43 million. According to the Education Data Initiative (EDI), the average amount owed is just over $37,000.
And while the majority of student loans are held by Americans at higher income levels, the negative impact of student debt on lower-income Americans takes a heavier toll.
Wipe out a significant chunk of that debt, and suddenly more people can qualify for and afford a home mortgage. At the very least, they’re better positioned to keep a roof over their heads.
According to a Zillow report, student debt puts many would-be homebuyers—especially buyers of color—close to or even over acceptable debt-to-income ratios, disqualifying them before they can even apply for a mortgage.
Millennials, Gen Z, and student loan debt
While Millennials and Gen Zers represent a smaller subset of the overall population, not only are they in or just entering prime homebuyer years, but they also tend to carry more student loan debt than older generations.
So, while it’s not the only thing standing between them and home ownership, it has an impact on their ability to buy a home.
In aggregate, you throw all these together in a blender and what you have is a monthly financial burden that may very well put homeownership out of reach.
While student loan debt may impact a relatively small minority of Americans, its effects ripple through the real estate industry.
If younger generations, burdened by student debt, cannot qualify for a mortgage, homebuyer demand over the next decades would likely reflect that to a growing degree.
Zillow’s report states that 53% of Millennials have not bought a home precisely because their student loan debt disqualified them or made it impossible to afford the mortgage payments.
Looking at the growing burden of student debt over the past decade, it’s easy to see why.
While a college education used to put graduates in a better position to pay off student loan debts, now the cost of higher education is growing faster than salaries, putting younger generations at a disadvantage.
Impact on two fronts
President Biden’s student debt forgiveness policy could impact Americans on two levels—an individual level and a systemic one that affects the housing market as a whole.
Regarding the first one, it’s a no-brainer that any kind of debt forgiveness is helpful to many individuals, freeing up more of their income to cover other monthly expenses.
According to a Zillow survey, almost one in ten student loan borrowers with an income-based repayment plan has less than 28% left of their monthly income to cover household costs, which disqualifies them for most mortgages.
Half of the renters and 39% of the potential homebuyers in Zillow’s survey held off on buying a house due to student loan debt.
As for the second front, Biden’s policy will do little to reshape the entire housing market. While it will undoubtedly help a number of individual borrowers, it isn’t likely to allow Millennials en masse to become homeowners.
This is true because other constraints on the market—higher mortgage rates, inflation, and low inventory—still exist and will continue to make it more difficult, especially for younger generations, to buy a home.
Supporters and opponents
President Biden, along with many other Democrats, are obviously the biggest and most vocal supporters of student loan forgiveness.
Some, like Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez, have proposed $50,000 in debt forgiveness—well over the number Biden ultimately chose.
Critics oppose student debt forgiveness, some referring to it as “bribery” or “desperate measures.” Even some liberal-leaning publications like The Atlantic have published pieces critical of the move.
Personal finance expert Dave Ramsey dismissed the move as “intellectually dishonest.”
If [student loans] are so bad that you have to cancel them, then why are you continuing to make them? You should at least stop making them before we start forgiving them.
Addressing borrowers, he continued, “Those of you who have your loans forgiven, we’re happy for you. The rest of you, we’re as pissed off as you are.”
But despite consumer worries that debt forgiveness might worsen inflation, those most affected by Biden’s decision are more likely to celebrate the removal of one significant impediment to home ownership.
Those extra hundreds of dollars per month can make a tremendous difference.
What this means for your clients
On an individual level, at least, clients who have the chance to erase $10,000 or even $20,000 in student loan debt will be in a better financial position to qualify for a mortgage loan.
Not only that, if Biden’s student loan forgiveness drastically cuts or even eliminates their debt, they’ll spend less on their monthly loan payment (once payments resume next year), freeing up more of their income.
Some will finally qualify for a loan, while others will be able to afford a larger monthly mortgage.
So, while this may not make an earth-shattering difference in the overall housing market, it will have an impact on individual American homebuyers who would otherwise not qualify for a mortgage—or not be able to afford one.
People that have student loan debt are typically renting right now… Use this as a way to stay in touch with people… You can jump in and help some people become homeowners. That debt gives you an asset. [Student] debt gives you a chance at a job. And we know how that works out by now.