As part of a debt-ceiling agreement forged by President Joe Biden and House Speaker Kevin McCarthy, monthly student loan bills will resume September first. What does the restarting of student loans mean for real estate, interest rates, and the overall economy? How are treasuries reacting to the news? (chart above)
What are the details of student loan repayment in the debt plan?
I think that most were surprised that student loans made it into the final debt relief compromise but the details of the restarting of payments are very similar to what President Biden conveyed earlier. The new act prohibits the Education Department from using its authority to extend the Coronavirus Aid, Relief, and Economic Security Act’s loan pause, “except as expressly authorized by an act of Congress.”
A representative from the White House said Biden wasn’t planning to extend the moratorium again and could still pause payments in a future emergency but as of now it looks like student loan repayments are in the process of ramping up with forgiveness mostly off the table based on the last supreme court ruling.
How many people will student loan repayment restart impact?
According to the May 2021 census data around 12.9% of the population has student loans with an average balance of around 60k. The federal student loan moratorium, which began under President Donald Trump, has been extended multiple times. The average monthly bill before the pandemic was $393 per borrower, and more than 40 million Americans currently have student loan debt. This equates to about 43.4 million people will need to restart making student loan payments.
How will the student loan restart impact prospective borrowers?
Increases in student loans will increase some prospective borrower’s debt to income ratios which will decrease the amount they are eligible to borrow. Furthermore if there are lates/defaults, there could be considerably more borrowers with impaired credit and in turn lower credit scores.
How will student loan forgiveness impact mortgage rates?
- Inflation/consumer spending should subside: Regardless of your political position on student loans, I hope everyone agrees that we have an inflation problem. Having the government continue to stop student loan repayments has put an addition 434 billion of liquidity into the economy which increased the spending power of millions of borrowers that contributed even more upward pressure on inflation. Reinstating student loan payments should help slow inflation as there is less consumer liquidity available.
- Interest rates: A reduction in consumer spending will be welcome news for the federal reserve. This should start flowing through the economy in the 4th quarter of the year or early 2024. Until then consumer spending will likely remain robust leading to rates remaining high and/or possibly heading higher. Even with a reduction in consumer spending due to loan repayment restarting I don’t foresee any imminent cutting of rates this year.
What impact will student loan forgiveness have on real estate prices?
As mortgage rates continue to stay high or possibly increase, the number of prospective buyers decrease as mortgage payments also increase. The further increase in rates will slow future appreciation and at some point, could drive depreciation in some markets as salaries cannot keep pace with the rise in payments. Furthermore, more borrowers will no longer qualify for mortgages or qualify for a lower amount due to the increased costs from student loan payments..
Will student loan payment restart push the economy into a recession?
Based on the data today, I don’t think the student loan repayment will push the economy into a recession. Currently there is a one year moratorium on late fees, default, etc… so struggling borrowers will just opt to not pay these bills which would delay a serious impact on the economy. The million dollar question is how much will this slow down consumer spending. As of this writing, we don’t fully know yet, but I suspect it will create headwinds going into 2024.
Furthermore, the current 10 year treasuries are not factoring in any major recession in the offing as they continue to remain higher signaling inflation will continue and a soft landing will be more likely. If a recession were coming, you would see 10 year treasuries start to decline as future growth would be reduced (the opposite of what we are seeing in the graph above).
Summary
However, you look at loan forgiveness, there are costs borne by everyone. Unfortunately, there is no money tree to pay for this and eventually the piper must be paid. As student loans restart towards the end of the year, look for consumer spending to finally take a breather to the tune of 38 billion a year. Unfortunately, it will take a quarter or two for this to flow through the inflation data so look for the federal reserve to maintain the high rates through year end and into next year. Mortgage rates will likely remain close to their current levels, which will ultimately lead to a continued reduction in sales and falling prices especially in higher priced markets.
Additional Reading/Resources:
- https://www.bloomberg.com/news/articles/2023-05-30/when-do-student-loans-restart-debt-ceiling-deal-will-require-payments-soon?srnd=premium
- https://www.brookings.edu/policy2020/votervital/who-owes-all-that-student-debt-and-whod-benefit-if-it-were-forgiven/
- https://www.bloomberg.com/news/articles/2022-08-23/biden-plans-wednesday-student-loan-debt-relief-announcement?srnd=premium
- https://www.nerdwallet.com/article/loans/student-loans/student-loan-debt
- https://www.washingtonpost.com/us-policy/2022/05/27/biden-student-debt-borrower/
- https://www.wsj.com/articles/white-house-planning-student-loan-announcement-wednesday-11661269442?mod=hp_lead_pos13
- https://www.bloomberg.com/news/articles/2022-08-24/biden-set-to-freeze-student-loan-repayments-for-four-more-months?srnd=premium
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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