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Student loan forgiveness probably wouldn’t have been the silver bullet to boost homeownership
Data show heavy student loan debt burdens keep more people in rental housing
One of the key political talking points amid all the lobbying for student loan forgiveness was that, by reducing the debt of heavily burdened millennials and Gen Z-ers, it would free up money for homeownership.
Now that the Supreme Court ruled 6-3 Friday morning to shut down President Biden’s plan to cancel $400 billion in student loan debt, what impact could that have on prospective home buyers?
Turns out, student loan forgiveness would have not have been a big factor, some industry experts have suggested.
“The unfortunate truth is that [student loan forgiveness] will hardly turn the dial for prospective home buyers,” Ally Braun, a spokeswoman for Redfin, told the Globe in November.
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The Biden administration had 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 showing “exceptional financial need,” according to the Department of Education) at the same income threshold would be eligible for up to $20,000.
Experts had said that student loan forgiveness probably wouldn’t have sparked a flurry of home purchases by those generational cohorts.
After all, the government suspended federal student loan payments during the pandemic. That means these payments weren’t a financial factor for many borrowers for more than two years.
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“For a lot of people, your monthly budget — once your loans are forgiven, or $10,000 of the loans are forgiven — might not look that much different than it does right now, [especially] if you were not factoring in those payments to your current expenses,” Nicole Bachaud, a senior economist at Zillow, told the Globe last fall.
Data show heavy student loan debt burdens keep more people in rental housing. A 2021 National Association of Realtors survey indicated that 51 percent of those borrowers surveyed put off or delayed purchasing a home because of student loan debt. In the Northeast, that number was much higher (61 percent).
Debt-to-income ratio factors significantly on how lenders determine whether someone is qualified for a mortgage. That ratio for a borrower clues the lender in on how much additional debt that person can take on.
Biden’s student loan forgiveness plan — which is less than what Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Ayanna Pressley, Democrat of Massachusetts, wanted: up to $50,000) — would have helped 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 moving forward, not having student loan debt is going to open up a little bit more wiggle room and breathing room for potential buyers who are looking at trying to find ways to qualify for a mortgage,” Bachaud said.
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Credit scores determine mortgage eligibility as well as interest rates. It isn’t a sure thing that forgiving student loan debt at either the $10,000 or $20,000 mark would have boosted them. It could even decrease them, depending on how the figure is calculated, because wiping out a borrower’s debt could eliminate a line of credit.
Prospective home buyers with student debt may want to look at other options. Braun, at Redfin, noted that Fannie Mae, Freddie Mac, and the Federal Housing Administration — some of the federal institutions that back mortgages — have programs to ease pressure on borrowers who carry heavy student loan debt.
Those programs, which can be tailored more to a person’s income and put less of an emphasis on a borrower’s overall student loan debt, especially benefit someone who may have an outstanding loan balance greater than $75,000, Braun said. That is a greater help than $10,000 in loan forgiveness.
“If put into place, the new [student loan forgiveness] policy is good, but it will not change the outcome for borrowers who could not qualify before,” she added.
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