Federal student loan borrowers haven’t had to make payments in over 40 months. But the longstanding payment freeze that began as an emergency measure in response to the COVID-19 pandemic is ending. Three years and nine extensions later, renewed student loan bills could come as a shock to some of the nearly 44 million borrowers with federal loans. And borrowers who left school in 2020 or later will need to gear up for their first-ever student loan payments.
Student loans began accruing interest again on Sept. 1, and borrowers will need to start making payments in October. According to the Federal Reserve Bank of New York, outstanding student loan debt stood at $1.57 trillion in Q2 2023. To quantify the impact of this in terms of monthly spending: In 2016, the average student loan payment was $393; adjusted for inflation, this is the equivalent of $503 today.
Percent of Balance 90+ Days Delinquent, by Loan Type
Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax
As the U.S. braces for the resumption of these student loan payments, there are growing concerns about the potential impact on the rental landscape. The prolonged pause, combined with increased consumer spending, has set the stage for a unique set of challenges. Here’s a deep dive into some of the anticipated repercussions:
A false sense of financial security. The 3.5-year forbearance period on student loans provided temporary relief to millions of borrowers. However, this pause, combined with stimulus checks and a rebounding economy, might have led many to adopt a more relaxed approach to spending. The sudden reintroduction of monthly loan payments could catch many off guard, especially those who have grown accustomed to a lifestyle without these payments.
Rising delinquencies. There’s a heightened risk of delinquencies as borrowers grapple with the sudden financial strain. This could impact their ability to meet rental obligations, leading to potential payment delays or defaults in the rental market.
Additionally, consumer prices rose 3.7% year over year in August, marking another month of inflation. And U.S. wage growth continues to decelerate and is estimated to hit its pre-pandemic average within the next six months after years of rapid growth. As the cost of living trends upward and wage growth continues to decelerate, it is possible that student loan borrowers will be faced with additional challenges to make payments in the years ahead—especially if that “extra” income from the student loan pause may have been partly eaten up by increased inflation.
Increased demand for less expensive rental options. As borrowers recalibrate their finances to accommodate student loan payments, there might be higher demand for more affordable rental units. Those who were considering upscale rentals might now opt for more budget-friendly options.
Continued declines in home sales. Without a significant correction in mortgage rates, renewed student loan obligations may exacerbate the 18-month (so far) decline in home sales. As the challenge of unlocking homeownership continues to affect current renters, renters may opt for a more flexible option such as single-family rentals or build-for-rent communities.
Landlord-resident dynamics. Landlords may need to adapt to changing financial pressures on residents. This could involve offering flexible payment plans or more flexibility on accepting late payments or even providing short-term rent concessions for residents facing genuine financial hardships.
Urban versus suburban shift. The added financial burden might push more renters to consider suburban or rural areas where rental costs are generally lower than in urban centers. This could lead to a redistribution of rental demand, with city centers experiencing reduced demand.
The end of the student loan forbearance period is not just a return to the status quo; it’s a significant financial shift after an unprecedented pause. Both renters and landlords will need to approach the coming months with caution, empathy and adaptability. The rental market is poised for change, and understanding these dynamics will be crucial for all stakeholders.