Biden’s student loan repayment plan could help more Americans become homeowners

The Biden Administration’s plan to help student loan borrowers lower their monthly payments comes with an additional benefit: It could help them more easily qualify for a mortgage.

The Saving on a Valuable Education (SAVE) plan was announced last summer, with the goal of helping more student loan borrowers qualify for lower monthly payments. According to the Department of Education, more than 4 million borrowers signed up for the program as of September.

Student loan and financial aid expert Mark Kantrowtiz told CNBC that “Switching to a repayment plan that has a lower monthly payment can help a borrower qualify for a mortgage.”

That’s because lower payments reduce borrowers’ debt-to-income ratio—a crucial calculation that helps banks determine mortgage eligibility.

“Those eligible for SAVE will experience reduced payments, which will, in turn, lower their debt-to-income ratio,” said Christelle Bamona, a senior researcher at the Center for Responsible Lending.

When adding up all the benefits of the SAVE plan, borrowers making $90,000 a year could see their monthly student loan payments fall by more than half, according to Kantrowitz. Someone earning $40,000 a year could reduce their monthly bill by up to 80%.

Student debt has become a thorn in the side of millions of borrowers after the federal government ended its payment forbearance program in October. According to Creditnews’ real-time student debt tracker, the average borrower is on the hook for between $200 and $299 in monthly payments.

That’s a large chunk of money and another barrier standing in the way of homeownership.

Student loan payments: Another barrier for first-time buyers

In addition to rising home prices and elevated mortgage rates, borrowers say student loan debt is a major factor delaying their ability to buy a home.

According to a 2021 study by the National Association of Realtors, half of borrowers who hadn’t purchased a home said student debt is a major reason why they haven’t done so. This figure is as high as 60% for millennials.

Non-homeowners expressed concerns that student loan payments would prevent them from saving up for a down payment on a house. They were also concerned that monthly payments would skew their debt-to-income ratio, making them less likely to qualify for a mortgage.

A more recent study by Morning Consult on behalf of Abbott showed that 91% of young adults with student loans are stressed about their finances.

An even higher percentage (94%) said they wanted to work for a company that provided 401(k) contributions so they could focus on paying down their student loans instead of saving for retirement.

Although student loans are a major sticking point for non-homeowners, they aren’t the main driver impacting housing affordability. The current housing market simply isn’t hospitable to first-time buyers—and the problem may get worse before it gets better.

Locked out of homeownership

One of the biggest problems with today’s housing market is there aren’t enough sellers. Scarce housing supply has kept home prices elevated, making it harder and harder for first-time buyers to qualify for a mortgage.

According to Creditnews Research, 64.5% of U.S. mortgages have rates below 4%. If these homeowners sell, they’d be trading in their current mortgage rate for a much higher one—something few are prepared to do.

As a result, millennials accounted for just 28% of homebuyers in 2023. Today, this generation owns a mere 10% of the country’s real estate wealth.

That's hardly surprising, considering it takes nine years for the typical homebuyer to save up for a down payment on an average home, according to Zillow.

Redfin’s chief economist, Daryl Fairweather, told CNN that the only “sustainable solution is to make it easier to build housing.”

That may be so, but it’ll take years for new supply to hit the market, especially with experts saying the U.S. housing shortage is anywhere between 3.2 million and 6.5 million units.

The SAVE plan can certainly help first-time buyers, but they still need to save up a hefty down payment and shop around for affordable markets to make homeownership a reality.