Here’s How Biden’s Student Loan Forgiveness Plan Affects Real Estate—You Probably Guessed It Already

The Biden Administration announced its student debt forgiveness plan a couple of weeks ago. Under the program, college graduates earning under $125,000 a year and married couples or heads of households earning under $250,000 per year will see up to $10,000 of their Federal student loans canceled. Pell grant recipients will see up to $20,000 of student debt written off.  

The move was welcomed by millions of college graduates struggling to repay student debt, but it also has been met with contradicting assessments by economists and others. 

You might think this doesn’t matter for those of us in the real estate industry, but you’d be wrong to think that. Here’s what you need to know about the program’s economic implications. 

More Inflation

The announcement of the student loan forgiveness plan immediately sparked an intense debate about the implications for inflation. The U.S. is already experiencing 40-year highs in inflation coupled with slowed economic growth. Some economists have raised concerns about the student debt relief program exacerbating this trend. 

The most pessimistic prognosis comes from the Committee for a Responsible Federal Budget. The organization asserts that canceling student debt undermines the “Inflation Reduction Act” and pushes inflation “up to 15 basis points up front and [creates] additional inflationary pressure over time.”

However, not all economic think tanks agree. The Roosevelt Institute offers an opposite prediction, saying that the student debt relief program would generate wealth, not inflation. The Institute explains that there is a flaw in the budgeting model that treats student loans and incurred interest “as if the foregone principal and interest payments over the entire lifetime of the loan all occur immediately.” Instead, it advises looking at the effects of the student loan forgiveness plan over two decades. Similar relief programs and subsidies, such as Affordable Care Act subsidies for prescription drugs, have been found to reduce, not increase the deficit over decades.    

The Roosevelt Institute also points out that the decrease in student loans would increase spending (called ‘the wealth effect’), which is good for the economy overall. However, it should be noted that more money in consumer pockets can continue to drive up demand, which can further enhance our supply issues, thus driving up prices.

Mark Zandi, Moody’s Analytics chief economist, says the effect on inflation is “largely a wash.” According to Zandi, writing off $10,000 in student debt per applicant will increase inflation by just 0.08%.

But What About Taxpayers?

Immediately following the announcement, many media outlets reacted with alarm about the potential implications for taxpayers, with one article by the National Taxpayers Union Foundation claiming that the student debt relief program could end up costing an extra $2,000 per taxpayer. 

However, the data modeling used to obtain that figure was the fact that almost a third of those who would be filing for student debt relief are joint, not solo applicants. The other thing to bear in mind is that the overall number of U.S. taxpayers increases over time, so the overall share of the tax burden of student debt forgiveness will decrease over time.

Finally, the taxpayer may end up not paying anything at all, with the cost of the student debt forgiveness program to be offset by cuts to spending in other areas. 

So Who Benefits Most?

Obviously, college graduates on lower incomes will benefit the most from the loan forgiveness program. Despite some economists voicing concerns about the program potentially lining the pockets of wealthier college graduates who don’t need student debt relief, The Penn Wharton budgetary model from the University of Pennsylvania estimates that “between 69 and 73% of the debt forgiven accrues to households in the top 60% of the income distribution.”

This translates as anyone earning less than $82,400. Although some high earners (those with solo incomes of over $125,000 annually) will end up benefiting from the program. However, the Penn Wharton model demonstrates that this will make up less than 5% of applicants. 

What Should a Debt Relief Applicant Do With The Extra Money Saved Each Month?

If you are one of the many college graduates who will see a part of their student debt written off, you may be wondering whether you should use the extra cash to invest.

First, you’ll have to be realistic about how much cash will be freed up. $10,000 isn’t a huge amount considering that the median amount of student debt per household in the U.S. is $28,950, according to Forbes. In some states, this figure is closer to $40,000. Monthly student loan repayments are around $200-$300, so most college graduates would only see an extra $100 per month, and in many instances less. 

However, even this small amount of extra cash could help propel some of your investments, especially if you’re already prioritizing savings each month. 

An easy way to get into real estate is by looking into crowdfunded real estate platforms, such as Fundrise. These allow you to become a co-owner of a rental property, often with as little as $1,000 upfront costs and small monthly payments. Alternatively, you can use the extra cash to go toward your down payment savings.

If you’re one of the potential beneficiaries of this announcement, we encourage you to use the extra money each month towards savings and investments.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.