Americans owe more that $1.5 trillion in student debt and you have to wonder why. In such counties as Germany, Sweden, Brazil, Malaysia, Morocco, and France a college education is simply free while in other countries the cost of a college degree is far less than in the US.
“Student debt is a real estate issue because it directly impacts credit scores and debt-to-income ratios, key measures used by mortgage lenders to qualify prospects,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of real estate data. “It’s the largest source of non-mortgage debt, and represents almost twice the amount owed for credit cards. As a result, millions of potential first-time homebuyers cannot get a mortgage.”
But now there’s the possibility of help in sight. President Joe Biden ran on a platform that included a proposal to reduce education debt by $10,000 per student. If passed it could greatly benefit large numbers of younger people with student loans, many of whom could then enter the real estate marketplace.
Figuring out why student debt has grown so much is not easy. Between the second quarter of 2013 and the third quarter of 2020 student debt grew from $990 billion to $1.55 trillion according to the Federal Reserve Bank of New York. That’s more than $500 billion more student debt in seven years. This happened even though the country has many low-cost state and community colleges as well as widespread scholarship opportunities.
Where does the money go? Here are the highlights according to EducationData.org,
- “The average cost of college in the United States is $32,889 per student.
- “The cost has doubled in 20 years, with an annual growth rate of 5.2%, or twice that of the U.S. dollar.
- “The average in-state student attending a public 4-year institution spends $25,396 for one academic year.
- “The average cost of in-state tuition alone is $9,308; out-of-state tuition averages $26,427.
- “The average private university student spends a total of $53,102 per academic year, $35,801 of it on tuition and fees.
- “Taking into account student loan interest and loss of income, the ultimate cost of a bachelor’s degree may exceed $400,000.”
Given that median household income today is $61,937 it’s obvious that most families cannot begin to pay college costs out-of-pocket. The result is that we have college-bound students agreeing to borrow tens of thousands of dollars and accepting years of debt days after they turn 18.
The Credit Crunch
It’s not just student debt that dooms the prospects of many potential first-time home buyers. There’s additional debt as well.
“Ninety-five percent of those with their own education debt outstanding had student loans, but many borrowers had other forms of education debt as well,” explains the Federal Reserve. “This included 23 percent who borrowed with credit cards, 4 percent with a home equity line of credit, and 11 percent with some other form. Collectively, 28 percent of borrowers had at least one form of education debt besides student loans. The typical amount of education debt in 2019 among those with any outstanding debt from their own education was between $20,000 and $24,999.”
“Student loans,” says Experian, “affect your credit report and credit scores, including FICO scores, the same way as any other debt on your credit report. Account information, such as the amount of the loan, your monthly payment amount, and your payment history are all factored in when a credit score is calculated.”
It’s possible for someone with student debt to avoid monthly payments as a result of COVID-19 pandemic moratoriums or by enrolling in an income-driven repayment (IDR) plan. As well, according to the Pew Research Center, borrowers can miss payments “because of deferment, forbearance, or enrollment in school.
About 6.5% of all current student debt is officially delinquent according to the New York Fed. However, the real delinquency percentage is under-reported because of the forbearance plans offered by the Department of Education under the CARES Act.
The Biden Plan
During the presidential campaign, Biden proposed $10,000 reduction in student loan balances, but only for government workers. New Majority Leader Sen. Chuck Schumer (NY-D) and Sen. Elizabeth Warren (MA-D) said in December that the reduction should be $50,000 while Biden broadened his proposal to $10,000 for all student borrowers.
What actually passes in Congress, if anything, is unclear. A $10,000 student loan reduction would make large numbers of current student borrowers debt-free. That would be very good for debt-to-income ratios and credit scores because there are no loan delinquencies, missed payments, or monthly payments if nothing is owed.
Alternatively, there are two major issues with the Biden plan. First, how will the debt reductions be funded – the government is already trillions of dollars in debt and the battle for federal cash is heated. Second, is this the best way to spend federal dollars? While a $10,000 reduction in student debt balances would be great for many borrowers, it’s not a cash transfer. Unlike additional money for the unemployed, the student loan borrower is not getting actual dollars to spend in the local economy. That limits the plan’s value.
For the real estate community a student debt reduction program would be good news. Potential buyers would more easily qualify for financing and that leads to more real estate demand, higher home prices, and more loan originations. In addition, a student debt reduction program could help would-be renters, those now living at home because they do not qualify for a lease.
Whether the Congress will ultimately pass a student debt reduction, or whether Biden can somehow cut student debt with an executive order, is uncertain. What seems assured is a full-scale congressional investigation to figure out why student debt has grown so rapidly, something which to this point baffles most borrowers, regardless of how many degrees they have.