How Will Student Loan Forgiveness Affect the Real Estate Market?

Student loan forgiveness isn’t just an idealistic concept anymore — it’s becoming a reality for millions of Americans. 

Soon, applications will open to forgive as much as $20,000 of student debt per borrower. It’s a bold plan, and one that’s inspired much speculation on how it will impact the broader economy. 

Homeowners, especially property investors, are certainly watching. Over 40 million people carry student debt, second only to mortgage debt. What are the practical impacts of changing so many people’s financial standing in this way — and how will it affect the housing market? 

Some homeowners might be eagerly awaiting a rush of newly debt-free buyers, while others might see it as an unjustifiable cost, not worth its potential benefits to the economy. 

It’s a complex question, but let’s try to unpack it. How are student loan forgiveness and the housing market related? 

Fast facts on loan forgiveness

Currently, the Biden administration plans to forgive up to $10,000 of student debt per borrower, and up to $20,000 for Pell Grant recipients. Loan forgiveness will be available to borrowers whose yearly income is under $125,000. 

In the United States, most people with student debt owe around $25,000. By various estimates, forgiveness of $10,000 would completely erase the debt of 33% to 50% of these borrowers. 

And there’s more to the plan than just canceling debt. Thanks to new, income-based repayment standards, those with loans remaining after forgiveness will see their monthly payment cut in half.

Low-income households stand to benefit the most from student loan forgiveness. Nearly all Pell Grant recipients come from households earning under $60,000, and are significantly more likely to be Black, Hispanic or Indigenous. 

Together, these measures have the power to free up a significant amount of discretionary income — especially for Millennials, Gen Z, and people of color, who made up the largest proportion of Pell Grant recipients.

How debt, forgiveness, and the housing market are related

Two things are necessary to enter the housing market — an available down payment, and eligibility for a mortgage. 

Student loan debt can affect both qualifiers. In fact, student debt is one of the most commonly cited factors that hold people back from buying their first home. 

Monthly loan payments can eat up disposable income, making it harder to save up for a down payment. Lenders also consider applicants’ debt burden when considering them for a mortgage, with large loans seriously holding back what they’re able to qualify for. 

Eliminating or reducing that debt load could allow borrowers to save more money for a downpayment, as well as increase their purchasing power and get approved for a larger mortgage. 

In theory, that could release an influx of eager buyers into the housing market. That increased demand could drive home prices higher, creating what’s known as a seller’s market. 

Imminent housing market changes — what to expect? 

But in reality, of course, things are rarely so simple. In practice, it’s unclear if Biden’s plan would affect the housing market this dramatically — or indeed, create a noticeable effect at all. 

First of all, demand for housing already outstrips supply in much of the United States. While of course, markets vary by region, most homeowners are not struggling to sell. 

This reality is reflected in the rising problem of housing unaffordability in the US, with over half of Americans considering it a major problem in their community. 

Debt cancellation also doesn’t realistically translate into the immediate ability to buy a home — at least not for the majority of borrowers. 

Even in a best–case scenario, would-be homeowners would need time to save up a down payment with the newly freed-up funds. That means it would take at least 12 to 18 months before this new influx of buyers hit the market.  

In many cases, student loan forgiveness won’t even result in extra spending money. Most loan repayments have already been frozen for the last two years. Borrowers have likely allocated those funds elsewhere, such as to keep pace with rising gas and grocery prices. 

Nor is student debt the only factor keeping new buyers out for the market. For example, mortgage interest rates are sky-high right now — recently hitting their highest since the 2008 financial crisis.

Cautious optimism for homeowners

Any changes in the housing market would take a while to become apparent after loan forgiveness is introduced. While there’s the potential to unleash major demand, in practice these effects could be limited. 

But overall, student loan forgiveness should be seen as a positive for homeowners. 

What does look fairly certain is that loan forgiveness will not outright harm the housing market, especially in active urban areas. There are already plenty of buyers looking for homes, and forgiveness would likely exaggerate forces already at play, rather than transforming the real estate market entirely. 

Depending on your region, owners may opt for a ‘wait and see’ approach, anticipating an influx of demand from newly debt-free buyers. In the meantime, renting out your home is a savvy move in many markets, allowing owners to generate passive income while their property rises in value. For a detailed outline of the factors to consider when determining whether to rent or sell, check out our e-book.

If you’re interested in renting out your home, but intimidated by the time and effort that goes into being a landlord, check out Belong. We’re a modern alternative to property management companies, making renting magical for homeowners and residents. 

Curious to see if your home qualifies? Reach out and schedule a consultation today.