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Homeownership is part of the American dream, but, for many, student loan debt keeps them from saving for a down payment. President-elect Joe Biden says he wants to change that. He is proposing a plan to forgive federal student loan debt by $10,000 per borrower*. That forgiveness would lower monthly loan payments, freeing up money to be spent in the economy, put toward other debt, or saved for a home.

People choose to attend college for many reasons, whether that’s to simply enhance their education or for better employment prospects and networking. In order to attend college, however, many have found themselves looking for aid to make that dream a reality. In fact, roughly 44 million Americans have tapped student loans to pay for their education.

For many, the benefits of using student loan debt far outweigh the cost, but the latter should not be ignored. The debt burden can inhibit borrowers later in their lives. For example, Federal Reserve research highlights that some borrowers say student loans prevent them from retiring or starting a business, while younger debtors are even putting off getting married or having children.

Student loans by the numbers, according to the Federal Reserve:

  • Student loan debt is valued at about $1.7 trillion.
  • The average student loan is about $30,000, with an average monthly payment of $393.
  • It is estimated that 54% of young adults who went to college did so by taking on student debt.
  • Currently 2-in-10 student loan borrowers are behind on their payments.

The Argument for Student Loan Forgiveness

The amount of current student loan debt is three times the levels from 2007 and is the second biggest debt type behind mortgages. This is one of the reasons why the $10,000 student loan forgiveness proposal is top on the incoming Biden administration’s list. Under the proposal, about 16.3 million, or more than one-third, of borrowers would become debt-free. For others, the forgiveness cuts $104 per month off their existing payment. The theory is that the impacted individuals can then take their saved money and reallocate the funds to other places in the economy.

The benefits to borrowers varies by income. The Federal Reserve found that borrowers with the highest income also have the highest student loan debt load as they paid for graduate and professional schools. From a housing point of view, those high-wage earners might already be able to buy a home. The additional cash on hand, however, could bulk up their existing down payments and qualify them for a more expensive home.

Yet, when student debt is looked at by wealth—defined as assets minus debt—lower-income individuals hold the vast majority of loans. A forgiveness program provides a huge boon to those households, as it represents a higher percentage of their income. For these borrowers, debt relief might open a door to first-time homeownership. According to Zonda’s millennial survey, student loan debt was listed as the second-most reason why those younger than 40 have not yet purchased a home, just behind “I can’t afford in the location I like.” The money saved on student loan payments could be used as future down payment funds, expanding the home buyer pool, especially at the entry level.

The Opposition to Student Loan Forgiveness

While student loan forgiveness would certainly provide a meaningful impact for some, many economists disagree that the program would create a significant stimulus to the broader economy. According to the U.S. Census Bureau, 64% of Americans do not have a bachelor’s degree, and, in turn, a forgiveness program would not provide a boost to their spending levels. Furthermore, it has been suggested that student loan forgiveness is just another program to subsidize the middle and upper classes.

Forgiveness isn’t easy or cheap, either. Economists look at the multiplier effect of different policies, which is like the way the real estate industry uses "highest and best use." For example, the nonpartisan group Committee for a Responsible Federal Government estimates that:

  • For every dollar spent by the federal government to forgive the student loan, 8 cents to 23 cents would be generated for the economy.
  • By contrast, increasing unemployment benefits would result in 67 cents for every federal dollar spent.
  • Sending federal funds to state and local governments would add even more—88 cents for every dollar.

It’s worth noting, though, that politics can and does influence which policies get implemented, even if a higher and better use exists. To help combat the pandemic’s impact on the economy, all of the above stimuli are being used or considered.

Given the recent results of the Georgia runoffs, which gave the Democrats control of the Senate via the slimmest of margins, student loan forgiveness is expected to be one of the first acts passed through Congress during President-elect Biden’s term. While the final amount forgiven is still up for discussion, Biden is expected to call for the $10,000 per borrower, as well as extending a pause on payments that is set to expire at the end of January. This move, especially in conjunction with the proposed first-time buyer tax credit, is anticipated to have a positive impact on the housing market, benefiting both higher- and lower-income debt holders.

*President-elect Joe Biden’s plan is more moderate than other proposals within his party. Some Democrats are suggesting a forgiveness program of $50,000 per borrower. That proposal would eliminate 75% of all student loans.