Cancellation of student debt and the housing market: advantage or not?

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Home ownership is part of the American dream, but, for many, student loan debt prevents them from saving for a down payment. President-elect Joe Biden says he wants to change that. It offers a plan to forgive federal student loan debt of $10,000 per borrower*. This forgiveness would reduce monthly loan payments, freeing up money to spend in the economy, allocate to other debts, or save for a home.

People choose to attend college for many reasons, from simply to improve their education to better job and networking prospects. In order to go to college, however, many found themselves looking for help to make that dream a reality. In fact, about 44 million Americans have used student loans to pay for their education.

For many, the benefits of using student loan debt far outweigh the cost, but the latter should not be ignored. The debt burden can inhibit borrowers later in life. For example, Federal Reserve research highlights that some borrowers say student loans prevent them from retiring or starting a business, while younger borrowers even delay marriage or childbearing.

Student loans in numbers, according to the Federal Reserve:

  • Student loan debt is valued at around $1.7 trillion.
  • The average student loan is around $30,000, with an average monthly payment of $393.
  • An estimated 54% of young adults who went to college did so while in debt.
  • Currently, 2 out of 10 student borrowers are behind on their payments.

The Case for Student Loan Forgiveness

The amount of student debt today is three times that of 2007 and is the second largest type of debt behind mortgages. It’s one of the reasons why the $10,000 student loan forgiveness proposal is at the top of the new Biden administration’s list. According to the proposal, around 16.3 million, or more than a third, of borrowers would be released from their debts. For others, the discount reduces their existing payment by $104 per month. The theory is that those affected can then take their saved money and reallocate the funds to other places in the economy.

Benefits for borrowers vary by income. The Federal Reserve found that borrowers with the highest incomes also have the highest level of student debt because they paid for college and professional education. From a housing perspective, these high earners might already be able to buy a house. However, the extra money available could increase their existing down payments and qualify them for a more expensive home.

Yet when student debt is examined against wealth, defined as assets minus debt, low-income people hold the vast majority of loans. A forgiveness program provides a huge boon to these households, as it represents a higher percentage of their income. For these borrowers, debt relief could open the door to home ownership. According to Zonda’s Millennial Survey, student loan debt was the second most common reason people under 40 haven’t yet bought a home, just behind “I can’t afford the place I’m in.” love”. Money saved from student loan repayments could be used as future down payment funds, expanding the pool of homebuyers, especially at the entry level.

Opposition to the cancellation of student loans

While canceling student loans would certainly have a significant impact for some, many economists disagree that the program would create a significant stimulus for the broader economy. According to the US Census Bureau, 64% of Americans are unlicensed and, in turn, a pardon program would not boost their spending levels. Moreover, it has been suggested that the cancellation of student loans is just another program to subsidize the middle and upper classes.

Forgiveness is neither easy nor cheap. Economists look at the multiplier effect of different policies, which is similar to how the real estate industry uses “highest and best use”. For example, the non-partisan group Committee for an Accountable Federal Government believes that:

  • For every dollar spent by the federal government to cancel the student loan, 8 cents to 23 cents would be generated for the economy.
  • By contrast, increasing unemployment benefits would translate to 67 cents for every federal dollar spent.
  • Sending federal funds to state and local governments would add even more – 88 cents for every dollar.

It should be noted, however, that politics can and does influence the policies implemented, even if there is higher and better use. To help combat the impact of the pandemic on the economy, all of the above stimuli are being used or considered.

Considering the recent results of the Georgia the runoffs, which gave Democrats control of the Senate via the slimmest margin, the student loan forgiveness is expected to be one of the first acts passed by Congress during President-elect Biden’s term. While the final amount forgiven is still under discussion, Biden is expected to seek the $10,000 per borrower, as well as extend a pause on payments that is set to expire at the end of January. The move, particularly in conjunction with the proposed first-time buyer’s home purchase tax credit, is expected to have a positive impact on the housing market, benefiting both high-income and low-income debt holders. .

* President-elect Joe Biden’s plan is more moderate than other proposals within his party. Some Democrats are offering a rebate program of $50,000 per borrower. This proposal would eliminate 75% of all student loans.

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