By Aarthi Swaminathan
Canceling a federal student loan of up to $20,000 could lower graduates’ debt-to-equity ratios, boost credit scores and increase their down payment, analysts say
All Honor Mann wants is to buy a house for her family of five.
La Butte, Mont. The resident, who hadn’t repaid her student loan before the payment break from March 2020, is renting, spending around $1,100 on a cramped bedroom. This is about a quarter of her household income.
Ideally, Mann, a 42-year-old mother of three who works in retail, would like to take out a mortgage and buy a house and lower her mortgage payments to $600 or $700 a month, which would make finances much more manageable. , and also help in asset accumulation.
She and her husband have good credit scores of over 700 and want to buy a house for around $180,000. But because his loans are in default, their applications continue to be denied.
“It’s frustrating that if you can pay $1,100 in rent, they’re not going to lend you enough to have that as a mortgage payment. It’s, like, if you can pay the rent, obviously you’re going to be able to pay the mortgage” — and maintenance costs, Mann added.
But thanks to a recent move by the Biden administration, Mann, who owes about $40,000 in federal student debt, co-owned by her ex-husband, is likely to bail out of default and buy this home. She had incurred the debt while attending Bible college in Indiana. And since she was a Pell Grant recipient, she’ll likely also see her debt burden drop by $20,000.
“It would be a game changer,” Mann told MarketWatch. “Just getting it in order would be a game-changer, and if we could separate the loans, that would be a miracle.”
The Biden administration announced last week that it would forgive federal student loan debt for some borrowers, a proposal that progressive Democrats — and even the president himself — have long championed.
The federal government plans to erase $10,000 of debt for borrowers earning up to $125,000 and provide additional relief of $10,000 to borrowers who received a Pell grant when they went to college .
The White House said the move would cancel debt for about 20 million borrowers and nearly 90% of the relief would go to households earning less than $75,000 a year. The administration also announced it would extend the pause on student loan payments, collections and interest until Dec. 31. The freeze was due to expire on August 31.
The federal government also plans to give troubled borrowers a “fresh start” by using delinquent loans to get them in good standing, meaning any defaults or defaults will be cleared and they can get back to work. payment in order.
For many student debtors like Mann looking to buy a home, outstanding loans have hampered their ability to save for a down payment on their home, affecting their debt-to-income ratio and credit score, a National Realtors spokesperson says the Association.
Thus, for these potential buyers, the cancellation of the debt is likely to impact them significantly.
For defaulting borrowers like Mann, the ability to start fresh may help some qualify for a mortgage for the first time in years.
Mann owns a federal family education loan, which was consolidated with her then-husband, in 2001. When her ex-husband stopped making payments after their divorce in 2011, her loans quickly fell into disrepair. default. The loan has been so long in arrears that it has disappeared from his credit report. But she was, before the pandemic, having her salary seized by the federal government.
Restoring her loans to their current state in addition to writing off $20,000 of debt would be a “big deal” for Mann, she said, because it would help her get back on track. to repay the debt, as well as to regain the ability to apply for a mortgage from the Ministry of Housing and Town Planning.
HUD did not respond to MarketWatch’s request for comment.
For the entire debtor student population, debt cancellation would mean that they would have an increased ability to take out a mortgage, or even save more for a down payment.
Early data implying that only the pause in student loan payments itself caused student debtors to reallocate funds intended for student loans to mortgages.
Using credit bureau data from February 2020, August 2020, February 2021 and August 2021, Urban Institute researchers found a “substantial increase” in first-time home buying among student borrowers during the payment pause, compared to non-borrowers. borrowers.
Most of these student borrowers were paying off their loans before the break took effect, meaning they were able to reallocate those funds to their mortgage.
“We see indications that at least for people who were making payments, removing those payments made them somewhat more likely to take out a mortgage,” Kristin Blagg, one of the report’s authors, told MarketWatch.
To be clear, this is not a direct relationship, they warned. This could be due to several reasons explained by Blagg and his co-writer Jason Cohn. During the pandemic, people have cut back on dining out, spending on vacations and other expenses, which could also have impacted their interest in taking out their mortgage — not just the pause in payments pushing them to do so. TO DO.
Still, for many borrowers, pausing payments helped improve credit scores, according to New York Fed research, which helped them through the homebuying process.
Canceling student debt would go one step further in helping student debtors, experts say.
On the one hand, it would also reduce borrowers’ debt ratios, especially if they did not have a substantial amount of outstanding loans.
In addition, debtors can use available money to save for a down payment, according to some evidence. As student loan payments are suspended, many debtors have taken the opportunity to save more money for a down payment, said Ali Wolf, chief economist at Zonda, based on surveys. of the millennium made by his company.
Student loan debtors benefiting from the break were able to save enough to cover down payments of around 5% to 8%, she estimated.
Interestingly, “often what people find is that they can actually make the monthly mortgage payment,” Wolf explained. Yet millennials have chosen rent, even with skyrocketing prices, because they are unable to cover the down payment, she pointed out.
So, by extension, she said there was “no doubt” that writing off $10,000 in student loan debt would help first-time buyers over time, Wolf said.
This will likely impact housing demand, an expert said.
The effect of canceling the debt of nearly 20 million borrowers “could significantly increase the pool of highly motivated potential first-time buyers with demand for around 1.5 million homes for sale,” Buck wrote. Horne, analyst at Raymond James, in a note. tuesday.
Horne’s back-of-the-envelope estimate, which looked at National Realtors Association survey data, and several other indicators, took into account that student borrowers in the past specifically indicated that they would use the debt relief to buy a house.
“Overall, we see this as a potential milestone for the US housing ecosystem,” Horne said.
“The potential to add incremental demand at the scale of 1-2 million newly eligible/qualified/motivated buyers in a US real estate market with only 1.7 million units currently available for sale…in our view , qualifies as a significant potential demand shift,” he added.
Therefore, the cancellation of student loans is likely to trickle down to the housing sector, helping first-time buyers, an academic added.
“President Biden’s student debt cancellation plan will make homeownership more accessible to 43 million Americans, and especially student borrowers from middle- and low-income families for whom cancellation strengthens the solvency and increases wealth,” Alí Bustamante, associate director for education, employment, and worker power at the Roosevelt Institute, told MarketWatch.
Do you have ideas on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at [email protected]
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