Student loans: How payments pinch renters, dash dreams of homeownership

Student loan borrowers could face housing hurdles in an already tight and expensive market once payments kick in later this year after a three-year pause.   

The money saved not paying on loans during this period helped some borrowers build savings or handle the rising costs of household goods and other necessities, including rent. 

Some analysts predict that the added costs of loan repayments could slash savings and force borrowers into difficult housing situations. 

“While the income needed for monthly rent payments remains the same with the resumption of loan payments, renters especially from the lower- and middle-income group will be forced to make difficult housing decisions and sacrifice some aspects to the quality of life,” Moody’s Analytics senior economist Lu Chen and economist Mary Le told The Hill. 

Borrowers who immediately resume payments in October will owe roughly $275 per month, Moody’s projected in a recent report. That could lead those in debt, especially low income borrowers, to look for alternatives, such as moving in with friends or family or finding a less expensive home.

Payments could also take a toll on younger borrowers, whose student loans make up a larger share of their individual debt compared to older generations. Student loans make up about 30 percent of the total debt for borrowers between the ages of 18 and 29, Moody's found.

Separately, polling conducted by The College Investor found that most debt holders are concerned about payments resuming, while more than half do not feel financially ready.

About 57 percent of 1,200 borrowers polled reported using the money saved by not making student loan payments to supplement essential costs, such as food and housing.  

Homeowning dreams delayed by payments

The extra monthly costs — along with rising mortgage rates — may also put the dream of homeownership out of reach. 

“The pause along with other pandemic incentives have driven up the savings for many, but higher cost of living caused by inflation and elevated interest rates made saving for future mortgage payments more financially challenging,” Moody’s Chen and Le said. 

“For first time buyers, this resumption of student loan payments serves as a disadvantage as it can make home ownership less accessible or even delay their ability to purchase a home,” they added. 

'A pipe dream at best'

Jeffrey Eden, a graduate student who originally graduated into a recession with a bachelor's degree in 2011, told The Hill that student loans over the years have limited his options and even served as an incentive to pursue more education. 

Now in the second year of his second master’s program, Eden, originally from Rhode Island, will enter the initial phase of repayment in forbearance. But he knows once he graduates again, the burden of debt will drastically impact where he lives. 

“The cost of living in my home state is simply too much. Of course, like so many others, homeownership would be great, but I’m a pragmatist and have made my peace with the fact that such a thing is a pipe dream at best,” Eden said. 

“We were saving for many years to move to NYC, but one car repair, two clinic visits, and of course, student loans, depleted those savings years ago. We’re essentially stuck and trying to survive; that is my generation’s way, after all,” he added. 

How housing costs spiked

Housing costs have risen substantially throughout the pandemic for both renters and homebuyers. A lack of supply on the rental side met significant demand and was compounded by the reentry of potential homebuyers, who were driven back toward rentals by high mortgage rates. 

Although rent prices are cooling in parts of the country, they remain stubbornly high while evictions are rising in several cities. Full-time workers across the country need to earn $23 per hour to afford a modest one-bedroom apartment at a fair market price, according to a report from the National Low Income Housing Coalition (NLIHC).

Workers earning minimum wage must work 104 hours per week to afford the same rental, according to the report.

Andrew Aurand, vice president of research at NLIHC told The Hill that low-income renters are already making sacrifices to make ends meet and spending far less on other necessities to pay for housing. 

“If they are forced to move because of an eviction or even if they decide on their own that they have to move, it can be very difficult for them to find a home they can afford and, instead, sometimes move-in with family or friends, which is often not sustainable, or into housing that is inadequate for them either in size or quality.” 

What borrowers can do as payments resume

As borrowers brace for impact, student loan experts are offering advice on how to prepare. Borrowers could consider signing up for automatic payments — which could save them about 0.25 percentage points on interest — make a budget and update information with their loan servicers, student loan expert Mark Kantrowitz told The Hill. 

Meanwhile, the Biden administration is implementing new programs that could cover some interest and lower monthly payments. 

The administration said eligible borrowers can enroll in the REPAYE plan, which will be converted to the SAVE plan this fall. 

The new plan will cut monthly payments from 10 percent of discretionary income to 5 percent and ensure unpaid monthly interest won’t cause a borrower’s debt to grow if they’ve been making their monthly payments. 

Still, student loan repayment notices are going out, setting in motion what Eden called an existential dread.  

“I started tallying up the monthly cost on top of all our other expenses and sure, it’s doable, especially if I skip a meal here and there and just ignore when I’m sick or something. It’s why I’m eager to either land a professorship or look into PhD study,” he said.