Student Loan Forgiveness Could Ease Debt Load For Would-Be Homebuyers

President Joe Biden's plan to eliminate as much as $10K in student debt for many borrowers could improve the financial situation of millions of Americans seeking to enter the homebuying market, creating ripple effects for multifamily properties.

Biden himself referenced the potential impacts for younger generations of people who have put off buying property because of student loan debt.

“All of this means people can start finally to climb out from under that mountain of debt,” the president said in remarks from the White House Wednesday. “To finally think about buying a home or starting a family or starting a business."

In theory, $10K in debt forgiveness, or $20K for Pell grant recipients, could enable would-be homebuyers to proceed with plans to buy property — and indirectly impact the for-rent market as renters become owners.

Student debt can impact a potential buyer’s ability to save for a down payment, the borrower’s debt-to-income ratio and their credit score, a spokesperson for the National Association of Realtors told Bisnow via email, citing the organization's own research.

"We encourage efforts to improve and streamline current lending programs and increase borrower education about the true cost of student loans," the 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.”

About 44 million Americans (30% of all adults) used student loans of some form to pay for higher education. Of those, 20% still owe money and 22% percent have paid off the debt, according to Federal Reserve data. 

Nearly 1 in 8 Americans still has student loan debt, but the impact is generational, with nearly half of all millennials carrying some amount of student loan debt.

But saving for a down payment is still a long process, and the for-sale market is a difficult place to navigate in today's economy.

The average student loan is about $30K, with an average monthly payment of $393. One-quarter of student loan borrowers (about 20 million people) have less than $10K in outstanding student debt, the Fed reports, so presumably that debt would cease to be a consideration in planning to buy property. 

The cost of housing ballooned recently, with the nationwide median price of an existing single-family house hitting more than $423K, up from $373K a year ago, NAR reports. Mortgage rates have spiked as well, making housing less affordable regardless of student debt status. 

General unaffordability of homes has boosted the already active apartment market in urban areas across the U.S. as people postpone homebuying. A surge of home sales could slow the appetite for apartments that has driven record construction in some markets.

The president proposed other changes to the repayment system that might impact borrowers' ability to budget for residential expenses. One change would let those with undergraduate loans cap their payments at 5% of their discretionary monthly income, down from the current 10% cap. 

Also, the administration wants the government to cover the monthly interest for those making payments, so that their balances will not increase despite those payments.

The administration asserts that it has the authority to cancel this much student debt, but the move might be challenged in court, though at the moment it isn't clear who would have standing to sue.