I was talking to a friend earlier, and she brought up an important topic: starting October 1st (next week), student loan repayments are back.
To give you a little background about student loans: there is almost $1.8 trillion currently. Take an average out of all the people who owe student loans right now, and it’s almost $39,000 per person. That’s a massive amount of student loan debt, and no one has had to repay on federal student loans in the last few years (since COVID started). Federal loans make up about 92% of the total loans.
Interestingly, payments are starting again next month. But they are not going to report negative pay history on those loans. So, if you pay late or pay nothing, there is not going to be anything derogatory posted until October next year.
What’s The Big Deal?
It means that there is a lot of money that will start coming out of people’s budgets again, at a time when inflation is high.
Will it impact the real estate market? To start off, it’s important to clear this up: even if you haven’t had to make payments on your student loan debt in recent years, from a mortgage perspective you would have certainly needed to factor in a payment in the calculations. From a qualifying perspective, everyone should still be in pretty good shape on these.
In fact, it could potentially be even better for mortgage qualification since they will go on the income-based repayment programs, which will be even lower than the original payment from before.
But we can’t ignore the fact that these payments will have an impact on overall affordability. Just because some people can qualify, there might be worries about what people can afford – making some people feel like buying a home is a little more out of reach.
The Domino Effect of Autopay
The other thing I thought was interesting, is that a lot of people will be on autopay. The potential concern is if the student loan gets paid… then they don’t have enough money to make other payments. For example, if the student loan payment eliminates the person’s ability to pay their car payment, then the car payment ends up as 30-days late, it will pull down people’s credit scores.
While we don’t need any more mortgage headwinds, I’m a big proponent of having people pay back the money they borrowed. This situation is a bit of a catch-22. If you have student loans, watch out and know that they are due again. Also, if you are already pre-approved, then you probably already have a payment number calculated in there.
If you have questions or need personal advice, then you can always reach out to our team here at Franklin Loan Center!