One in eight people across the country has student loan debt, including nearly one in two millennials. There are more student loan holders in America than there are people in Canada.
These loans provide millions of Americans access to higher education, whether at community colleges or four-year universities. But after caps are tossed and diplomas are framed, monthly bills promptly come due. For some, these payments are a minor nuisance, having a negligible impact on their finances. For other less fortunate debt holders, these payments can hinder or prevent them from saving up for important purchases, namely the most important purchase of all: a home.
In fact, 60% of non-home-owning millennials say student loan debt is delaying their ability to buy a home, according to a National Association of REALTORS® (NAR) poll. Onerous debt payments, “delay them from saving for a down payment,” says Jessica Lautz, vice president of demographics and behavioral insights at NAR. Additionally, loans increase debt-to-income ratios, which generally must be kept low to qualify for a mortgage; and late or missed loan payments can damage all-important credit scores. When indebted individuals are eventually able to buy a home, their outstanding balance “may impact the type and size of a home that they can purchase,” adds Lautz.
As it happens, these debt-saddled citizens may be on the verge of receiving the reprieve of a lifetime in the form of widespread loan forgiveness. But how exactly forgiveness might impact homebuyers is unclear.
After two years of paused student loan payments during the pandemic, around 40 million Americans are set to resume paying on September 1, but President Biden has indicated he may intervene. On the campaign trail in 2020, Biden committed to a policy of forgiving a portion of federal student loan debt. And after months of hemming and hawing, a decision is finally expected from the president before the end of August on whether or not he will take executive action to cancel some of these loans. Only loans owned by the government would be eligible to be forgiven, which amount to around $1.4 trillion, three-quarters of all outstanding student debt.
Various plans have been leaked and floated over the months, but the most commonly cited proposal includes forgiving $10,000 per borrower earning less than $150,000 or per married couples filing jointly who earn less than $300,000 per year.
To put that in perspective, if enacted, the policy would result in the erasure of between $200 and $400 billion worth of debt. Tens of millions of Americans would be impacted, and one-third of all borrowers, who owe $10,000 or less, would see their outstanding balance drop to zero overnight.
How would debt forgiveness of this scale affect student loan holders interested in homeownership? Might relief of this magnitude stimulate a home-buying spree? Economists are skeptical of an immediate impact on the housing market but believe that debt relief could have a downstream effect on home-buying activity. The size of the likely effect is disputed, as are the groups of people most likely to be impacted.
The downstream effect
Meta Brown, an economics professor at Ohio State University, co-authored a 2020 analysis for the Federal Reserve Bank of New York, which illustrates the relationship between student debt and homeownership. It concluded that increases in student debt could explain up to 35% of an eight-percentage point decline in homeownership for 28-to-30-year-olds during the 2010s.
The mean student loan increase during that era, $5,700, arising from tuition hikes, “did indeed move the needle in terms of age 30 homeownership,” says Brown.
Another study in the Journal of Labor Economics in 2019 found a clear correlation, concluding that every $1,000 increase in student loan debt is associated with a one to two percentage point drop in the homeownership rate of student loan borrowers in their mid-twenties.
But the linkage between increased debt burdens and lower levels of homeownership does not necessarily mean homeownership rates will instantly tick up after a portion of debt is relieved.
One reason for this is the tax implications associated with loan cancellation. In general, debt forgiveness is considered taxable income, with some exceptions, so this will trim down total savings.
Another factor to consider is the way student debt is recompensed. Because it is serviced in monthly installments, any savings stemming from decreases in payment size will take time to accumulate. By contrast, the effect of the stimulus checks, which were used by a quarter of first-time homebuyers to help pay down payments, was felt immediately.
“I don’t see the impact on housing being immediate in the short term,” says George Ratiu, a senior economist at realtor.com®. But he added that $10,000 in debt forgiveness would “lessen the financial burden for millions of Americans,” allowing them to “actually contemplate homeownership as a viable alternative in the short term. Because what we’re doing in a sense is we could be speeding up the financial decisions that many people have put on hold or pushed back a few years.”
Ratiu adds that $10,000 in forgiveness would only add up to a fraction of the average 10% down payment needed for a home listed at $450,000, the median list price in June on Realtor.com. “So obviously that is a significant hurdle to overcome,” he says.
Potential winners and losers
Luis Quintero, an economist who studies housing markets at the Johns Hopkins Carey Business School, cautions that this type of targeted relief could exacerbate inequality in the housing market.
“I’m skeptical of the overall impact on the housing market, but if the impact is going to increase homeownership, my concern is who is getting the benefits?” questions Quintero.
While other government relief programs like food stamps are directed toward households below the poverty line, recipients of student loan relief would largely be amongst the middle-class. The median income of households holding student loans is $76,400, 7% of whom are below the poverty line, according to a Brookings report. Quintero worries that this relief targeted toward middle- and higher-income households would make the housing market even less affordable for those who haven’t had the benefit of having gone to college.
“Often policymakers don’t see it this way, but whatever happens to one person in the market for housing is going to affect others that also want a house in that market,” adds Quintero. “And even if you are not in the same range of quality—even if you are in the market for a low-end home because you’re a low-income person—you are going to be affected by an increase in demand for higher-end homes.”
Quintero adds, “So I’m worried that if you have a situation where a Black household and a white household are competing for a home, then there’s a higher probability the white household has a college degree, and therefore is the one that will be able to bid more for the home after the policy is implemented.”
Thirty-five percent of white adults, aged 25 and older, have a bachelor’s degree or higher, while that number is 21 and 15 for Black and Hispanics, respectively, according to findings from National Center for Educational Statistics. However, Black college graduates also hold more student debt than their white counterparts, with the average Black graduate owing $52,726 four years after graduation, compared to $28,006 for the average white college graduate, according to a Brookings report.
What debt-holders are saying
Meanwhile, young debt-holders have mixed feelings about how Biden’s proposed loan cancellation policy would affect their home-buying experience.
“Having $10,000 of loans forgiven would significantly impact our house-buying experience,” says Gwyn Thomas, a 27-year-old nonprofit worker in Kansas City, Missouri who, along with her husband, holds $65,000 in federal student debt.
Conversely, Blake Friedman, a 29-year-old veterinarian living in Manhattan who owes over a quarter of a million dollars in student debt, says cancellation “wouldn’t make much of a difference to me,” noting that it would not speed up his home-buying timeline. “It’s just not enough to really have an impact,” he adds. In the near future he will begin slowly chipping away at his debt at a rate of about $1,500 per month.
Nash Weiss, a 25-year-old farmer in Wisconsin, is agnostic. He holds $75,000 in student debt, but would not qualify for forgiveness under the proposed policy since his loans are private. For now, he’s put his home-buying plans on hold until he has paid down his debt. “Until it’s paid off, it reduces the monthly mortgage I can afford by nearly $1,000,” says Weiss, who will likely remain on the sidelines of the housing market for several years.
All eyes, at least the eyes of a great many federal student loan holders, will be on President Biden in the coming days as he prepares to make a decision on widespread debt forgiveness.
Meanwhile, the homeownership rate in America is projected to continue falling for every age group in the coming years, according to an Urban Institute report, while college tuition prices and student loan debt burdens continue to rise year after year.
Brendan Rascius is RISMedia’s associate editor. Email him your story ideas to brascius@rismedia.com.
