By Ryan Casey Stephens, FPQP®
Special Contributor
Fulfilling a promise made on the campaign trail, President Joe Biden announced his plan to cancel some student loan debt for qualifying borrowers today. According to the White House, those who make less than $125,000 a year ($250,000 for a married couple) can seek cancellation for $10,000 in debt, or $20,000 if they attended college on a Pell Grant. The plan also reduces the maximum monthly repayment for current and future borrowers in income-driven repayments to 5 percent of discretionary income (down from the previous 10 percent cap).
A Mortgage Lender’s Perspective
It’s not yet clear what net effect this announcement will have when it comes to helping borrowers qualify for a mortgage, but at first glance, I don’t see this as a magic bullet.
Let’s examine a case study — our young, first-time buyer, Emily. She rents in Dallas and is in her second year out of college working as an engineer. Since she earns $85,000 a year and qualifies for debt cancellation, but since she did not receive a Pell Grant, her benefit is limited to just $10,000. Her $50,000 in loans will now become $40,000, but they’ve been deferred since COVID-19 deferment began.
Emily was already prequalified to buy a home this year and calls her lender to find out how much more house this change will help her purchase. Her lender explains that, since her loans are deferred, he was planning on locking through Freddie Mac, which allows him to use just half a percent of her total loan balance as a monthly payment for qualifying. Half a percent of the $10,000 she’ll no longer have to repay only amounts to $50 a month more qualifying income for Emily. Since her mortgage will be more than $2,800 a month, she quickly realizes that repaying less student loan principal is a much bigger deal long term than the benefit she’ll see as she buys her first home.
Beyond the case study, the reduction might mean more to borrowers who are no longer in deferment. The average student loan in the United States is $39,351 with an average payment of $393 monthly. Since $10,000 would cancel roughly 25 percent of that average, those borrowers would expect to see closer to $100 a month in savings.
The Headline We Should Be Writing
As a lender, I’m much more interested in the fact that the announcement included a provision that extends payment deferment through December 31, 2022.
For only a short time longer this year, buyers currently benefitting from deferment have more purchasing power than they will have for years to come. Once that period ends, thousands of prospective buyers will be hit with higher payment amounts that will potentially limit their qualifying amount.
Buyers should take note of an advantageous collision of events — namely, less competition on listings, softening home prices, steady interest rates, predictions that home prices will continue to appreciate, soaring rent nationwide, and now a little longer to benefit from student loan deferment.
The time to act is now!
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
