The U.S. administration recently shaved $10,000 off each federal student loan balance, which is great news for some — and, for others — the end of civilization as we know it.

This controversial decision has certainly rocked the boat, pushing many young adults closer towards homeownership. But at what cost to the broader economy?

Like any other type of debt, student loan debt is incompatible with qualifying for a mortgage, as it overloads the household’s debt-to-income ratio (DTI).

Most lenders allow DTIs no higher than 31% at the front-end (including the mortgage) and 43% at the back-end (all debts included).

But unlike other common debts, such as auto or credit card loans, student debt balances tend to be much higher — and the pay-off schedule is significant, often 10-20 years from graduation or withdrawing from school.

Thus, for many college graduates, the presence of student debt is a lot like paying off a mortgage — only, at the same time, also paying rent. With no income available to set aside to save up for a down payment, student borrowers unable to rely on windfalls like family gifts are forced to delay homeownership.

True, a college degree enables households to earn higher incomes. The average college grad makes twice as much money over a lifetime than the average high school grad, according to the National Center for Education Statistics (NCES).

However, the average bachelor’s degree recipient leaves school with federal student loans totaling a whopping:

  • $26,100 for public colleges;
  • $29,000 for private non-profit colleges; and
  • $35,700 for private for-profit colleges, according to the NCES.

For many, their totals are much higher, with 21% of student borrowers owing $50,000 or more, including 2% of borrowers owing over $200,000, according to the Federal Reserve Bank of New York.

As the cost of education has increased steeply in recent decades, roughly two-thirds of college grads borrow money to complete their degree. By racial/ethnic group, the largest share of student loan borrowers are Black and Latinx students.

Older readers may be scratching their heads, trying to figure out why they were able to pay for college without taking out loans, but today’s generation of college grads are saddled with huge amounts of debt.

Consider 1970, when the average annual tuition, fees, room and board was just $10,900 (in 2020 dollars).

By 2020, this cost more than doubled, to $25,900, according to the NCES. Again, this figure includes inflation adjustments. College is simply more expensive.

Further, in years past, the U.S. government paid for the college education of many young people. The most significant instance was through the GI Bill, passed in 1944. This bill provides for the education of service members, as well as loan guarantees for homes and businesses. Following World War II, students attending school on the GI Bill made up half of all college students. Today, the share of students attending school on the GI Bill makes up just 1% of all college students.

Biden’s debt relief plan

While the full details have yet to emerge, the administration’s announcement to cancel large amounts of student debt includes:

  • forgiving up to $10,000 for federal loan borrowers with household incomes up to $250k;
  • forgiving up to $20,000 for Pell Grant recipients, who come from lower-income households;
  • reducing monthly payments for income-driven repayment plans, for undergrad loans only, from 10% of income to 5%;
  • making public service loan forgiveness easier to access;
  • increasing the number and dollar amounts of Pell Grants available, which do not need to be repaid;
  • working towards making community colleges free; and
  • resuming student loan payments, which have been paused during the pandemic, in January 2023, according to the White House.

For eligible borrowers who presently owe less than $10,000, the balance reduction will cancel their loans altogether. This is especially true for borrowers with already-reduced loans due to years of paying down their balances prior to the pandemic-induced pause.

Will this sudden windfall cause the number of eligible homebuyers to skyrocket — or even further contribute to 2022’s dangerously high inflation rate?

Not likely.

Every person with federal student loans has had their monthly payment on hold since April 2020. In other words, they have been paying zero dollars each month on their student loans. Therefore, even though the new plan will result in a lower monthly payment compared to before the pandemic, when compared to what they’ve been paying over the past two-and-a-half years, this will be an extra bill to pay beginning in January, when loan payments resume.

So, this reduction in loan balances is not so much a windfall as it is a wink and a shrug toward the general problem.

Either way, student loan borrowers with balances remaining will end up paying more in the coming months or years than they have in the past two-and-a-half years. They might end up spending less than they would have if loan balances hadn’t been reduced. But spending more than today — or, for that matter, at any point since 2020, when they also had access to individual stimulus checks?

There’s no way.

Related article:

Now spent, stimulus payments leave no lasting impacts for households

On the other hand, what about those who will see their remaining balances forgiven by this debt reduction — will they now be enabled to become homebuyers?

It’s possible. But to what end, when interest rates have slashed buyer purchasing power, home sales volume is slowing and consumers can smell the coming recession on the wind?

Anyone buying today is not doing so from the position of a savvy investor. Home prices have peaked, and once they begin to fall in earnest, homebuyers will fully retreat until the recession is passed and prices have bottomed.

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