Trump Brings Back Student Loan Forgiveness—and the Housing Market Could Benefit

The Trump administration has agreed to deliver long-delayed student debt relief to thousands of borrowers in an abrupt reversal that could ripple far beyond college classrooms.

The move follows a lawsuit by the American Federation of Teachers (AFT) which accused the administration of stonewalling loan discharges for borrowers who had already made enough qualifying payments on their federal student loans to have the remaining balance forgiven. But now, after almost a year of bureaucratic purgatory, those debts may finally be wiped away.

What's more, is that the administration has also promised not to tax the forgiven balance—which is subject to federal income tax—preventing what some borrowers feared would become a "tax bomb" come April 15.

It's a move that has no doubt already brought relief to borrowers who feared that the Trump administration would make good on its promise to roll back forgiveness for federal loans, a hallmark of the Biden era. And it's a move that may bring unexpected relief to the housing market.

The median age of first-time homebuyers has never been higher, according to data from the National Association of Realtors®. Inflated home prices and stubborn mortgage rates have contributed to this arrested development, but under market tensions lies another, more insidious factor: debt.

Student loan burdens increased by nearly 70% from 1992 to 2022, ballooning from $73,000 to $122,000, according to research from First American. While the higher incomes of college grads and longer loan terms have buoyed some borrowers into homebuying, it hasn’t been enough to lift an entire generation into the American dream.

Forgiving student loan debt could breathe new life into a stagnant housing market by energizing a swath of homebuyers who've been stuck on the sidelines—just as buyers are gaining more leverage than they've had in years.

What the new plan does, and who it helps

In a joint status report filed in federal court, the Trump administration and AFT agreed to pause the ongoing lawsuit in exchange for the Department of Education to resume canceling the remaining balances of eligible Income-Based Repayment (IBR), Income-Contingent (ICR), and Pay As You Earn (PAYE) borrowers, essentially restarting the forgiveness pipeline.

Importantly, this is not a new forgiveness initiative, but rather the administration making good on a promise that had long been part of the deal with federal loans. Under these plans, borrowers who make consistent, qualifying payments—typically over 20 to 25 years, depending on the plan—are entitled to have their remaining balances forgiven. The joint agreement compels the Department to honor those obligations after a period in which loan discharges had slowed or stopped altogether.

"This is a tremendous win for borrowers," Winston Berkman-Breen, Protect Borrowers legal director, said in a press release. “The U.S. Department of Education has agreed to follow the law and deliver congressionally mandated affordable payments and debt relief to hard-working public service workers across the country, and will do so under court supervision. We fully intend to hold them to their word.”

The agreement does not, however, offer any clarity to the nearly 8 million borrowers on the Saving on a Valuable Education (SAVE) Plan, who remain in interest-bearing forbearance after a court ruling blocked the program. Nor does it extend to borrowers holding private student loans, who remain ineligible for federal relief.

How student loans affect homebuying power

The decision comes at a critical time for the housing market.

Buyers are gaining power as seven of the 50 largest metros tip into buyer's markets, and another 23 are perfectly balanced, according to the Realtor.com® August 2025 Monthly Housing Report.

With affordability still stretched by high mortgage rates, buyers who can shed student debt—or simply see the end in sight—suddenly have an edge. They’re entering negotiations with cleaner balance sheets and stronger buying power than they’ve had in years.

“Forgiveness programs give borrowers the ability to plan their finances toward homeownership as they have a clearer picture of when their student loan debt will no longer be a factor in their monthly expenses,” says Betsy Mayotte, president of the Institute of Student Loan Advisors. 

It's more than just a clean slate for borrowers—forgiveness has a compounding effect by freeing up more liquidity in household budgets and improving a borrower’s appeal to mortgage lenders. Here’s how:

Delayed down payment savings

An obvious way that student loans are affecting homebuyers today is by taking away a portion of their income that they could be putting toward a down payment. Today, the median down payment for a home is $30,400, according to a report from Realtor.com. It's an amount that is already far below the gold standard of 20% for a median-priced home of $419,200.

Saving $30,000 or more can seem insurmountable when you’re already putting $536 a month toward student loans for the next 20 years, which is the average monthly loan payment and term, according to the Education Data Initiative. 

As a result, many borrowers delay or put off down-payment savings entirely, making it even harder to buy a home.

Debt-to-income ratio

“Many folks have stated that their student debt is one of the big reasons for why they don't own a home. Their debt-to-income ratio is often too high,” says Sabrina Calazans, executive director of the Student Debt Crisis Center.

A debt-to-income (DTI) ratio is a calculation of your monthly debt payments against your monthly income. It’s used by lenders to help determine if they will issue you a mortgage, as well as the rates and terms they extend you.

Federal loan repayment programs like the Saving on a Valuable Education (SAVE) repayment program have used income-contingent calculations to keep borrowers' DTI low, but recent court challenges to these formulas now pose an additional threat to homebuyers with student loans.

One TikToker took to the platform to show the difference in her husband’s payments after the proposed changes to the SAVE plan: His payments will jump from below $500 to nearly $5,000 a month.

“It’s frustrating and just annoying when people ask, ‘Why aren’t you guys buying a house?’” she said in the video. “We already have a mortgage payment, and it's his [student] loans.”

This dramatic tenfold increase not only takes away a significant portion of the couple's monthly income, but it risks driving up their DTI and disqualifying them from a mortgage as long as they shoulder high monthly debt payments, pushing their dream of homeownership further out of reach.

“Forgiving [borrowers’] loans and reducing the debt-to-income ratio may allow [borrowers] to pursue that dream,” Calazans says.

How would loan forgiveness affect the housing market?

To understand the impact forgiveness would have on the housing market, look no further than Illinois, where a state program helps homebuyers overcome their student loan burdens. 

SmartBuy—which was instituted by Gov. J.B. Pritzker to expand affordable housing in the state—helps eligible homebuyers pay off up to $40,000 in student loans and offers an additional $5,000 in down payment assistance.

James Ekstrom, a Rockford, IL, resident, was able to purchase his first home after having $37,000 of student loan debt forgiven.

Without his monthly loan payments, Ekstrom told WTVO, “I plan to continue reinvesting that money definitely into this property and also plan on actually creating another account to set some capital aside to eventually, in the near future, probably very soon to acquire another property, possibly.”

Applications for the Illinois program have now closed because funding has been exhausted, but Ekstrom’s story highlights how forgiving student loans can create liquidity for buyers and reinvigorate a stagnant market by buying and investing in it.

But the real impact of forgiving student loan debt is likely to reach far wider.

“We believe that debt cancellation would help the financial situation of millions of borrowers and allow for them to start families and businesses, buy homes, and invest in their futures,” Calazans adds.