​Student-Loan Burdened Renters Will Trade Down Apartments, Cut Spending

Apartment operators now must begin to wonder about their residents: If they can’t pay their student loans, how are they going to pay the rent?

Payments are coming due this fall for millions of federal student loan borrowers who had their payments paused since March 2020 as part of the pandemic relief efforts to assist those struggling financially.

The Supreme Court recently struck down President Biden’s student loan forgiveness plan and interest on loans will resume in September while monthly payments are expected to resume in October.

“This will be a major financial shock and additional burden to younger renters or millennials, especially those in the low- and moderate-income group who are rent burdened,” according to a report by Moody’s Analytics.

As many as 5 million student loan borrowers will need to resume making payments of close to $275 per month on average, amounting to nearly 0.25% of GDP, said Moody’s Analytics Chief Economist Mark Zandi and Moody’s team.

Given that individuals’ loan specifics don’t change, this will potentially force “households to cut back on discretionary spending or face difficult housing decisions such as trading down from Class A to Class B/C rental units, or even having to share a unit with family or friends to avoid homelessness,” the report said.

On average, a median-income household spends about 30% on renting an average-priced apartment unit in the United States.

Zandi said that for places where large rent disparities exist between Class A and Class B/C units, taking $275 out of the monthly budget may leave families on the margin little choice but to trade down in housing to restore the lost wages now allocated for student loan payments.

Moodys finds that suburban Virginia, Denver, San Francisco, Washington D.C., and Northern New Jersey have the highest population ratio in the 25-44 age group and likewise have above-average disparity between Class A and Class B/C rent.

“This switchover could magnify the existing housing shortage and structural imbalance,” Zandi said in the report.

“Already extremely tight Class B/C rental markets where inventory growth was lagging could become even more competitive and less affordable for moderate- or low-income families.”

Jay Lybik, national director of multifamily analytics at CoStar Group, tells GlobeSt.com that the impact will basically be felt at the Class B level (aka 3 Star properties).

“These renter households already are stretched financially due to high rent growth experienced in 2021 and the first half of 2022,” Lybik said.

“Additionally, it will put pressure on potential household formations as their monthly expenses just increased by a good chunk with student loan payments starting up again. So, the real impact will be felt in the 3-Star space.

“Some households will seek roommates or move back home with their parents. Historically, we haven’t seen these renters move down into Class C space. Thus, the impact will be less demand for mid-priced multifamily properties and further downward pressure on rent growth. This could lead to an actual pullback in rents in some cases, but these will be minimal.”

Needless to say, this will affect retail spending, especially discretionary “luxury” goods, according to Colliers.

Brandon Svec, national director of US retail analytics at CoStar Group, tells GlobeSt.com that the resumption of student loan payments will drag on consumer spending and by extension, the retail sector.

“Many consumers are already getting close to tapped out,” he said.

“We see this through rising credit card balances, reduced savings rates, longer auto loan terms and higher rates of default, increases in personal and installment loan balances., etc. All signs point to a consumer that, although employed, is struggling to keep up under the weight of higher costs and rates, and increasing their debt service costs further will impact their spending capacity and by extension, retail sales. Discretionary items, experiences, and services are all likely to be impacted to some extent.”

Svec said the actual impact is difficult to measure at this time, as it is unclear exactly how many borrowers will take advantage of the 12-month on-ramp for restarting payments or utilize the new Income-Driven Repayment plan that went into effect on July 1 and will significantly reduce borrowers’ required monthly payments.