We've all heard by now that the Biden administration has relieved so many student loan borrowers of much of their debt. We've read the $10,000 or $20,000 if it's a Pell Grant etc. So, no reason to outline the policy… But let's look at some other statistics and see exactly how this relates to buying a home or qualifying for a mortgage.
In 2021, the median outstanding student debt was between $20,000-$24,999. The average debt for those graduating with a bachelor's degree was $28,400. But many others may have much more/less student loan debt. Receiving a reduction of 40%-50% of the median total balance must feel awesome for those who owe.
Just a bit more info to make sure we're all on the same page... There were nearly $32 billion of the $1.6 trillion in outstanding federal student loan debt that was already forgiven—for public sector workers, disabled borrowers, and students who were defrauded by for-profit colleges. The administration's plan also included forbearance or no student loan payments until the end of this year. That makes it nearly 3 years of students not having to repay.
You may also have read that 20 million households are behind on their electricity bills. That’s $16 billion of late energy payments. It could be argued that it would be fairer to pay these energy bills than to eliminate student debt. But he didn’t, so let’s stick to why we are here.
Let’s ignore the possible increase to inflation by effectively injecting an additional $300 billion into the economy, just to keep it simple.
Does that borrower now qualify for a home loan? Home buyers with student loans do have that payment go against their income. For an FHA loan, if they do not have a payment that would amortize out (meaning pay the balance off in the given loan period), then we would apply a 1% of the total outstanding balance as a monthly payment. Conventional ranges between 0.5-1.0% and VA will allow not hitting the borrower if a student loan payment if the payment is deferred for 12 months or more.
In any case, it's easy to see that a student loan payment—particularly if their credit report does not have an amortizing payment showing—could drastically hinder their borrowing ability.
The $10,000 elimination of student loan would increase the borrower's ability by $100 (1% of $10k = $100 reduction of debt payments). That translates to an increased mortgage of $45 or put another way an increase in borrowing ability of $3,405 plus-or-minus depending on interest rate, credit etc. That's interesting given that $10,000 was just forgiven yet they're able to borrow 34% of that forgiveness in a mortgage.
Maybe you don't want to buy a home.
If you already own a home and you would like to refinance to pay the rest of your student loan off, fix the house up, or whatever you want to do with the money, the calculation would be the same. But of course, as previously indicated, interest rates, credit scores, loan to value (LTV), and other factors are important and can vary.
I saw several programs and read many articles on the social benefit or pain of this decision. It may or may not in fact be legal, it may or may not be fair. But it is out there and probably will go through!
I have no doubt that all aspects will be covered for several news cycles to ad nauseam. But one thing I believe isn’t able to be argued—education is one of the few things that can NOT ever be take away from you. Everyone wants to know things or at least be able to know enough to say, “I don’t know enough to speak to that topic.” And surely America is better off having a more educated population than not.
The cost of said education is great, I agree, especially at many of the top ranked schools. But do people have connections that could greatly increase your ability to be considered for that special job you are looking for? So how can you really put a price on education?!
However, being pragmatic and not judgmental - it's good to simply look at the facts. Those borrowers that have student loans can now afford more.
And if you have any questions, or want free consulting regarding real estate and mortgages, feel free to reach out to us!
We've all heard by now that the Biden administration has relieved so many student loan borrowers of much of their debt. We've read the $10,000 or $20,000 if it's a Pell Grant etc. So, no reason to outline the policy… But let's look at some other statistics and see exactly how this relates to buying a home or qualifying for a mortgage.
In 2021, the median outstanding student debt was between $20,000-$24,999. The average debt for those graduating with a bachelor's degree was $28,400. But many others may have much more/less student loan debt. Receiving a reduction of 40%-50% of the median total balance must feel awesome for those who owe.
Just a bit more info to make sure we're all on the same page... There were nearly $32 billion of the $1.6 trillion in outstanding federal student loan debt that was already forgiven—for public sector workers, disabled borrowers, and students who were defrauded by for-profit colleges. The administration's plan also included forbearance or no student loan payments until the end of this year. That makes it nearly 3 years of students not having to repay.
You may also have read that 20 million households are behind on their electricity bills. That’s $16 billion of late energy payments. It could be argued that it would be fairer to pay these energy bills than to eliminate student debt. But he didn’t, so let’s stick to why we are here.
Let’s ignore the possible increase to inflation by effectively injecting an additional $300 billion into the economy, just to keep it simple.
Does that borrower now qualify for a home loan? Home buyers with student loans do have that payment go against their income. For an FHA loan, if they do not have a payment that would amortize out (meaning pay the balance off in the given loan period), then we would apply a 1% of the total outstanding balance as a monthly payment. Conventional ranges between 0.5-1.0% and VA will allow not hitting the borrower if a student loan payment if the payment is deferred for 12 months or more.
In any case, it's easy to see that a student loan payment—particularly if their credit report does not have an amortizing payment showing—could drastically hinder their borrowing ability.
The $10,000 elimination of student loan would increase the borrower's ability by $100 (1% of $10k = $100 reduction of debt payments). That translates to an increased mortgage of $45 or put another way an increase in borrowing ability of $3,405 plus-or-minus depending on interest rate, credit etc. That's interesting given that $10,000 was just forgiven yet they're able to borrow 34% of that forgiveness in a mortgage.
Maybe you don't want to buy a home.
If you already own a home and you would like to refinance to pay the rest of your student loan off, fix the house up, or whatever you want to do with the money, the calculation would be the same. But of course, as previously indicated, interest rates, credit scores, loan to value (LTV), and other factors are important and can vary.
I saw several programs and read many articles on the social benefit or pain of this decision. It may or may not in fact be legal, it may or may not be fair. But it is out there and probably will go through!
I have no doubt that all aspects will be covered for several news cycles to ad nauseam. But one thing I believe isn’t able to be argued—education is one of the few things that can NOT ever be take away from you. Everyone wants to know things or at least be able to know enough to say, “I don’t know enough to speak to that topic.” And surely America is better off having a more educated population than not.
The cost of said education is great, I agree, especially at many of the top ranked schools. But do people have connections that could greatly increase your ability to be considered for that special job you are looking for? So how can you really put a price on education?!
However, being pragmatic and not judgmental - it's good to simply look at the facts. Those borrowers that have student loans can now afford more.
And if you have any questions, or want free consulting regarding real estate and mortgages, feel free to reach out to us!
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