Home Buying

Student loan forgiveness may not be the silver bullet to boost homeownership.

‘The unfortunate truth is that this will hardly turn the dial for prospective home buyers.’

Adobe Stock; Ally Rzesa/Globe staff
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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 some degree of student loan forgiveness, save for any holdups in court, appears on track, housing economists aren’t exactly expecting a flood of millennial and Gen Z buyers who weren’t already in the market.

“The unfortunate truth is that this will hardly turn the dial for prospective home buyers,” said Ally Braun, a spokeswoman for Redfin.

The Biden administration 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 are eligible for up to $20,000.

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Applications are open for this relief, but an appeals court ruling has blocked the initiative. But even if, or when, the measure picks back up, experts say it shouldn’t spark a flurry of home purchases by those generational cohorts.

After all, the government suspended federal student loan payments during the pandemic and continues to do so. That means these payments haven’t been a financial factor for many borrowers for more than two years.

“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,” said Nicole Bachaud, a senior economist at Zillow.

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.

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Biden’s student loan forgiveness plan — even at the current proposal, which is less than what Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Ayanna Pressley, Democrat of Massachusetts, wanted: up to $50,000) — would help 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.

But it’s still too early to determine the exact impact on homeownership rates.

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 boost 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.

Will this improve people’s credit scores overall? “The answer is nobody knows,” Bachaud said. “For each individual person, the answer is going to differ. … That’s definitely not an avenue that would likely be the main driver of affordability getting better or people becoming more mortgage ready.”

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It may be too early to speculate on just how much student loan forgiveness will have on the housing market beyond reducing monthly loan payments and freeing up cash. But housing affordability isn’t likely to be a byproduct of the program, housing experts said.

Zillow doesn’t anticipate a massive decline in home prices nationally due to an influx of people into the market, Bachaud said. When more people leave the sidelines and enter the housing market, that puts pressure on prices to go up.

Rather than focus on student loan forgiveness, prospective home buyers 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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