As the Federal Student Loan repayment suspension just passed its three-year anniversary, young homebuyers appear to have reaped some of the rewards. Between the paused payments and economic stimulus checks, many young Americans have taken advantage of their fatter-than-normal wallets.
But with the payment pauses ending come October, borrowers have to reckon with their debt. A fair share may have already spent the funds on other items, including down payments.
Loan payments have been extended nine times since March 2020, and there was even a proposal under the Biden administration for student debt relief to forgive thousands of dollars of debt. While the debt relief plan was shot down by the Supreme Court, the administration has a Plan B.
Enter the Saving on Valuable Education, or SAVE, plan, an income-driven repayment plan that can cut borrowers’ monthly payments in half and will leave many people with a $0 monthly bill. According to the U.S. Department of Education, instead of paying 10% of their discretionary income a month toward their undergraduate student debt under the previous Revised Pay As You Earn, or REPAYE, plan, borrowers will eventually be required to pay just 5% of their discretionary income. And borrowers who make under $15 an hour won’t need to make any payments, the department says. In addition, under the SAVE plan, the agency will cease charging interest that is not covered by the borrowers' monthly payments.
Putting it into perspective, previously, a borrower who made $40,000 a year would have a monthly student loan payment of around $151. Under the SAVE plan, their payment would drop to $30. But due to the timeline of regulatory changes, this plan and its benefits may not come to fruition until next summer, which could impact student debtors — especially when it comes to homeownership.
Does Targeted Relief Work?
Some argue that this is still not enough to alleviate the debt crisis and help homeownership efforts. The Jain Family Institute (JFI), established in 2015 as an applied research organization in the social sciences, recently released a report titled, “Student Debt and Young America in 2022.” The report evaluated specifically how President Biden’s student debt payment pauses have affected young Americans with burdensome debt. According to the report, the findings are based on two anonymous data sets purchased by the JFI that include 1 million 18- to 35-year-old student debtors pulled each year from 2009 through 2022, and 1 million student debtors’ credit archives between 2009 and 2022.
The results are self-described as “mixed; … systemic disparities in student debt burdens persist when it comes to race and class: Black borrowers still suffer from disparate burdens on top of already having lower incomes, and most borrowers distribute into the lowest wealth categories despite many having high incomes.”
The report also notes tactfully that student debt balances have decreased for two years. JFI says that the decreases are concentrated amongst low-income and minority borrowers.
Eduard Nilaj, a co-author of the report and a data science research associate working on JFI’s higher education finance team, says that while this is progress, borrowers’ incomes have subsided as their debts have.
“We unfortunately also have no way to anticipate what will happen when those student loan payments start back up again,” he said. “So far we’ve been able to see a small attempt at the homeownership gap being closed. The resumption of payments could widen [the gap] again.”
Nilaj pointed out in the report that the homeownership rates of young borrowers increased in 49 states and the District of Columbia from 2020 to 2022. Despite this increase, Nilaj said we still find a negative and significant relationship between student loan debt and homeownership for young borrowers in 2022 due to the looming start of repayments.
The Money Might Be Gone
One issue is the money that was supposed to be forgiven may already have been spent. Intelligent.com surveyed borrowers who qualified under Biden’s plan for up to $20k in federal student loan relief. It discovered 58% are unprepared for payments to resume. Nearly half of borrowers who believed they would receive relief spent money they otherwise would not have, while 37% used the money to pay off other debt. Others spent it on unnecessary purchases, including vacations, substances, and gambling.
More than half of borrowers (58%) say they are ‘very unprepared’ (35%) or ‘somewhat unprepared’ (23%) for payments to resume. Only 12% say they are ‘very prepared, while 28% say ‘somewhat prepared. Additionally, 27% say they are ‘likely’ (10%) or ‘somewhat likely’ (19%) to refuse to pay the $10,000 in relief they thought they were going to receive.
James Allen, a certified financial education instructor (CFEI), financial advisor, and CPA, discusses the impact of the ruling. “The Supreme Court decision is a cold shower for those who had their hopes pinned on a $10,000 relief. It’s like waiting for a tax refund only to find out the IRS made a mistake. The impact? Well, it’s back to square one, folks. The dream of a financial breather has evaporated. (It) might be a setback, but it’s not the end of the world. It’s just a reminder that in the game of loans, the house always wins.”
