Student Loan Change Could Make It Harder for Borrowers to Buy Houses

As the last extension of government-mandated pauses for student loan payments expire, borrowers who don’t make timely payments will likely get hit with negative marks on their credit reports. These delinquencies could make accessing other lines of credit, like a mortgage for a home, more difficult.

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Why It Matters

An estimated 7.5 million borrowers are in default for their student loans, according to data from the Department of Education, and defaults may rise with the pause on collections ending. Over 43 million Americans have student loans, and about one-third of borrowers say their loans have delayed them from buying a home, according to Gallup.

First-time homebuyers are at a record low, and student loans can make it harder for people to save enough to afford a home in the current market.

What To Know

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A default on a federal student loan, or any line of credit, can result in a lower credit score and adverse action on a person’s credit report. Negative marks can also stay on a credit report for a long time.

Equifax, one of the three major credit bureaus in the U.S., notes that accounts that have been sent to collection agencies stay on a person’s report for about seven years.

A mortgage loan is often a requirement for securing the funds needed to purchase a home. Negative marks on a borrower’s credit report can make securing a new line of credit more difficult and more expensive.

Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “If you’re in the market for purchasing a house and have defaulted on your student loans, that process of such a major purchase just got substantially more difficult. Defaulting on student debt is a signal to future lenders you may not pay back your loan, especially a potentially sizable one.”

The government paused involuntary collections for delinquent student loan accounts in March of 2020 at the start of the COVID-19 pandemic. This pause also included a stop on the accrual of interest and the requirement to make student loan payments. After more than four years, multiple extensions and the implementation of temporary programs like Fresh Start, the Biden Administration’s final extension is set to expire this month.

What People Are Saying

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Kevin Thompson, finance expert and founder/CEO of 9i Capital Group, told Newsweek: “Many borrowers anticipated their student loans would be forgiven or eventually reach a point where they no longer had to make payments. However, with the resumption of repayments, many people find themselves unprepared. This sudden financial obligation could be particularly detrimental for those who had incorporated non-payment into their budgets, making it harder to save for a home or qualify for other types of credit.”

Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “While we can’t say for sure what changes could come to student loan repayments under the incoming Trump administration, we do know President Trump in the past has voiced significant opposition to student loan forgiveness and relief packages introduced under the Biden administration. It’s a fair assumption that some, if not all, of those introduced will be going away in the coming months unless legally or legislatively upheld. This means the monthly payment amount for many may increase if programs like SAVE are discontinued, and that can take a bite out of the savings many are putting toward a house or car purchase.”

What Happens Next

Borrowers can explore options to improve their credit profile to make accessing credit in the future possible. If you can’t afford your student loan payment, the Consumer Financial Protection Bureau recommends borrowers “contact your servicer to learn about student loan deferment, student loan forbearance, or affordable repayment plans to postpone or reduce or your monthly payment.”

“Integrate student loan repayments into your financial plan to avoid falling behind on other obligations. Showing stability and a manageable debt-to-income ratio is crucial for mortgage approval,” Thompson said.

“The next step is to make room in your budget—or by expanding your income—to pay down additional debt that has accumulated through interest. After a few months, you’ll start to see your credit score improve, and lenders will be more willing to issue you a loan for a home or any other major purchase given your new path,” Beene said.