The Department of Education has reinstated credit reporting for missed student loan payments. The ripple effect is expected to directly affect the housing market.
Student loan payments were paused during the pandemic and reinstated in October 2023. However, at that time, missed payments were not reported to the credit bureaus — a buffer designed to transition borrowers back to paying. That grace period has now ended. Credit scores and debt-to-income ratios could be affected by reporting missed payments on credit reports. Both are pivotal in securing a mortgage, Newsweek reports.
“Credit plays a critical role in homebuying,” Kevin Thompson, CEO of 9i Capital Group, told Newsweek. “Poor credit can lead to higher interest rates or even prevent access to credit altogether.”
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Massive Defaults
According to the Education Data Initiative, over 40 million Americans have student loans, of which almost 5 million are in default. The average amount of student loan debt is $38,375 per borrower.The Department of Education's numbers are even more alarming. According to their data, one-third of the people who should be making student loans actually are.
The Federal Reserve Bank of New York expects there to be nine million delinquencies by the end of June. Amongst the penalties for defaulting on student loan payments could be wage garnishment, tax refund seizure and reductions in social security benefits, according to the Department of Education.
Record Credit Card Debt And High Interest Rates Are Making Things Worse
“Many of the households required to resume paying on their student loans are also struggling with credit card debt at near-record interest rates and high-rate mortgages they thought they would be able to refinance into a lower rate, but haven’t,” Mark Zandi, the chief economist at Moody’s Analytics, told the Times.
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“Without immediate intervention, we could face the largest wave of defaults in the program’s history,” student loan servicer Nelnet told the Times. That could seriously dent the chances of a large swathe of potential homeowners qualifying for mortgages.
According to a 2019 study by the Federal Reserve, from 2005 to 2014, homeownership among people ages 24 to 32 fell nine percentage points, to 36% from 45%. Although there were many contributing factors for this, the Fed said that about a fifth of the decline, or 2%, was directly attributed to student debt, which translated to about 400,000 borrowers who were prevented from home ownership.
A $1000 Increase In Student Loan Debt Drops Homeownership By 1.8%
A study by the University of Chicago in 2020 determined that a $1,000 increase in student loan debt from a four-year public college dropped the homeownership rate by about 1.8 percentage points for college-goers during their mid-20s. It was the equivalent to an average delay of about four months in attaining homeownership.
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Beware Of Your Home Equity
One way of paying for student loans or affording a down payment on a new home is by tapping into parental home equity. The increase in house prices has meant many long-term homeowners are sitting on vast amounts of equity. However, The Wall Street Journal says accessing it isn’t always easy. Interest rates are higher than they were when many of these mortgages were first taken out, and thus, owners are reluctant to incur extra debt at high interest rates.
Also, having a home that has increased in value reassessed to get a home equity loan could also increase the tax rate. It’s a Catch-22 for many owners because if they do not tap into their home equity, colleges, calculating how much financial aid to offer a prospective student, could take their equity into consideration, the Journal says.
Michael Korch, founder of College Funding Counselor in Seattle, told the Journal, “this is the one time in their lives when they want to look as poor as possible.”
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