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How will Biden’s student loan relief affect homeownership?

About 45% of borrowers, or almost 20 million people, would have their student loan debt fully canceled

How will President Biden’s executive action to erase $10,000 in federal student loan debt affect homeownership? While industry watchers don’t expect the debt forgiveness to move the needle in a significant way, it could have a net positive impact on homeownership long term.

About 45% of borrowers, or almost 20 million people, would have their student debt fully canceled, according to the White House.

Given that the relief will be $10,000 for government-backed loans and $20,000 for Pell Grant recipients making less than $125,000 per year, the move seems most impactful for potential homebuyers where student loan debt of less than $20,000 was the barrier to purchasing a home. 

“Individuals who were on the cusp of being able to afford a home may see enough of a change to be able to purchase,” said Toby Mathis, founding partner of Anderson Business Advisors.  

“For someone who is severely debt-burdened, the $10,000 may not make enough of a difference to allow for home ownership right now but may provide positive momentum to make it a goal that they can achieve in the future,” Mathis said.

More than 43 million Americans have federal student debt, with about a third owing less than $10,000 and more than half owing less than $20,000, according to the latest federal data. 

While the loan relief amount is likely to have a “negligible impact” on the home-buying process, it can help future renters with cash flow, noted Logan Mohtashami, lead analyst at HousingWire.

“Since most of the delinquent student loan debt is on loan balances of $10,000 and under, this can free up some cash flow for renters,” said Mohtashami. “For those who finished college and have good-paying jobs, on the margin, it can help, but nothing in a significant fashion.”

Student loans and homeownership are closely tied together, a National Association of Realtors’ 2021 report on impact of student loan debt showed. About 60% of non-homeowning millennials said student loan debt is delaying them from purchasing a home, making them the population most affected by student debt.

Student debt can impact a buyer’s ability to save for a down payment, the borrower’s debt-to-income ratio and their credit score, a NAR spokesperson said.

“We encourage efforts to improve and streamline current lending programs and increase borrower education about the true cost of student loans,” a NAR spokesperson said. “That being said, we continue to see record lows in housing inventory and while these changes may lower the debt burdens on some potential buyers, there are not enough homes on the market to meet current demand.”

Dave Savage, chief innovation officer at Mortgage Coach and Sales Boomerang, echoed NAR’s comment and added the improvement of a homebuyer’s DTI ratio will expand opportunities, which will expand opportunities for first-time homeowners, especially in underserved markets.

“It is going to help put first-time homebuyers short and long term because the debt-to-income ratio is lower and their total monthly debt payment is less,” said Savage. “We have an affordability crisis and this is going to serve the underserved market.”

The flip side of potentially more homebuyers entering the market is the inflationary impact on prices when more millennials decide to buy a home because of debt forgiveness. 

A recent analysis from the Committee for a Responsible Federal Budget (CRFB) found that the $10,000 forgiveness plan would undermine the Inflation Reduction Act by consuming nearly 10 years of deficit reduction and wipe out disinflationary benefits.

“Debt cancellation would boost near-term inflation far more than the IRA will lower it,” CRFB said. The “$10,000 of debt cancellation could add up to 15 basis points up front and create additional inflationary pressure over time.”

Whether it will impact housing prices, which are already facing downward pressures, will depend on mortgage rates and the number of student debt holders who are able to purchase a home who otherwise could not have absent the debt forgiveness and moratorium, said Mathis. 

“It would be ironic if the debt forgiveness ultimately made homeownership less affordable and harmed the very people the forgiveness intended to help.”

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