For over three years, borrowers with federal student loans haven’t had to worry about student loan payments. The Coronavirus Aid, Relief and Economic Security (CARES) Act paused federal loan payments.
However, that’s coming to an end. Payments will resume in October, so borrowers must budget to afford their payments. That issue has caused some economic and real estate experts to raise concerns about the connection between student loans and the housing market. With payments resuming, there could be a significant impact on real estate.
How the Federal Loan Payment Pause Impacted Real Estate
In 2020 — when the CARES Act went into effect and suspended federal student loan payments — the Federal Reserve reported that the typical student loan payment was between $200 and $299 per month.
With the federal payment freeze, borrowers had hundreds more monthly dollars to allocate to other expenses or goals. As a result, many people decided to pursue their goals of homeownership.
According to a study by the Jain Family Institute, homeownership rates among young borrowers increased in 49 states between 2020 and 2022. As of 2022, 18.9% of young borrowers were homeowners, the highest percentage in years.
Student Loans and the Housing Market: What Happens Next?
For three years, no interest accumulated on federal student loans, and borrowers didn’t have to make any payments toward their debt. But after several extensions, the federal payment pause will end this fall. Interest is to accrue starting in September, and payments will begin in October. Worse, the Supreme Court ruled against President Biden’s loan forgiveness plan, crushing the hopes of loan forgiveness for millions of borrowers.
Budgets are about to get tighter for borrowers with outstanding student loan debt. And when it comes to student loans and the housing market, there are a few issues that may occur:
Borrowers May Struggle to Afford Their Student Loan Payments
For those that bought homes during the federal payment freeze, the restart of payments may be a shock. With hundreds of dollars needed to make the minimum student loan payment, homeowners’ budgets may be stretched thin, putting them at risk of falling behind or entering student loan default.
Renters May Put Off Buying a Home
According to Redfin, the median home price in the United States was $408,200. Between the high price and student loan payments resuming, pricing many potential buyers out of the housing market. Renters may choose to delay buying a home to pay down their debt instead, which could damage home sale rates.
High-Interest Rates May Make Homeownership Less Attractive
In 2021, the average mortgage rate was under 3.00%. But as of August 2023, rates are sky-high, averaging 6.9% for a 30-year mortgage. Why is that such a big deal? Let’s look at these examples.
Carl bought a home for $408,000 in 2021. He put down 20% of the purchase price and financed $326,400 at 2.9% interest. With a 30-year fixed-rate mortgage, his monthly payment — not including taxes or insurance — was $1,359. Over the life of his mortgage, Carl will repay $489,240
Jeff waited to buy a home until 2023. He also purchased a home for $408,000 with a 20% down payment, but he qualified for a 30-year mortgage at 6.9% interest. Even though his home’s price, down payment, and loan term are the same as Carl’s, Jeff’s mortgage is much more expensive. His monthly payment is $2,150 — $791 more than Carl’s —, and over 30 years, he will repay $774,000. Thanks to the higher rate, Jeff will pay $284,760 more than Carl over the life of the mortgage.
| Carl’s Mortgage | Jeff’s Mortgage | |
| Purchase Price | $408,000 | $408,000 |
| Down Payment | 20% | 20% |
| Amount Financed | $326,400 | $326,400 |
| Rate | 2.9% Fixed | 6.9% Fixed |
| Term | 30 Years | 30 Years |
| Monthly Payment | $1,359 | $2,150 |
| Total Repayment Cost | $489,240 | $774,000 |
As you can see, buying a home is much more expensive than it was just two years ago. And with student loan payments becoming due, many borrowers won’t have the extra cash needed to cover the additional amount required due to current mortgage rates.
Balancing Student Loan Payments With Housing Expenses
As you prepare for federal student loan payments to resume, you may be worried about the impact of student loans on the housing market and your dream of buying a house. If that’s the case, these steps can help you balance your debt with your goal of homeownership:
- Create a budget: Creating and sticking to a budget is vital to managing your money and juggling your financial goals.
- Cut spending: Look for areas where you can trim or eliminate your spending. Canceling subscriptions, getting a roommate and shopping around for car insurance are all ways to reduce your expenses so you can more comfortably afford your student loan payments and boost your house fund.
- Pick up a side hustle: Earning some extra money can help you save money for the down payment on a house and pay off your debt faster.
- Explore repayment options: If your payments are too high, use the federal payment simulator to determine if you could reduce your payments by signing up for an alternative payment plan.
- Consider refinancing: If you have high-interest or private student loans, refinancing your debt could help you secure a lower rate and reduce your monthly payments. With ELFI’s student loan refinancing program, you can refinance federal and private student loans and qualify for a loan term as long as 20 years.
Learn more: How student loan debt can affect buying a house
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