With federal student loan debt totaling about $1.75 trillion in America, people are spending more than ever on debt payments. This kind of debt has forced many to delay major purchases and significant life changes like starting a family. With so many people struggling to pay off their debt, nervous about what an inflationary economy or medical emergency could mean for their finances, the question of student loan forgiveness is especially relevant.
One consideration of a student loan forgiveness plan is its effect on the stock market. We’ll explore that question in this article.
Key takeaways
- The student loan forgiveness program is unlikely to be like the stimulus money during the COVID-19 pandemic. Some experts viewed the stimulus checks as an indirect cause of the meme stock rallies and increased investment in speculative assets.
- President Biden’s student loan forgiveness program would help poor and middle-class families who could use financial relief.
- It’s believed that young people will benefit from the plan because student debt payments have held many back from investing in real estate and starting a family.
The Most Recent News on Student Loan Forgiveness
In August of 2022, President Biden announced he was ready to deliver on a $300 billion student loan forgiveness plan. Biden outlined how the program would cancel up to $10,000 of federal student debt for most borrowers and up to $20,000 for Pell Grant recipients.
The press release from the White House estimated the program would provide aid to over 43 million borrowers. That figure included an estimated 20 million borrowers who could see the remaining balance of their federal student loans canceled.
According to the same press release, 87% of the funds allocated through the program would go to those earning less than $75,000 per year. The White House designed the program to aid those who need it most, so individuals with an annual income over $125,000 and households making over $250,000 are not currently eligible.
However, through a series of lawsuits, the program has yet to go into effect. Appeals have taken Biden’s loan forgiveness plan all the way to the Supreme Court, which heard oral arguments for the case in February 2023. Analysts expect the court to reach a decision by June of this year.
How Will The Student Loan Program Impact The Economy?
One rationale for student loan forgiveness is that it will put more money into the economy by canceling people’s debt. Some people will have their debt eliminated, while others will benefit from lower monthly payments.
Biden’s plan includes provisions to cap monthly payments for undergraduate loans at 5% of borrowers’ discretionary income. The White House estimated this would lower the average annual student loan payment by over $1,000 for current and future borrowers.
Student loan debt has negatively impacted many young folks for years. College graduates with student loans have had to delay home ownership, deal with a lower net worth when applying for credit, and have less money overall to spend.
Freeing up a few hundred dollars would mean those who benefit from the program have more to spend, which could stimulate the economy. Increased spending could mean anything from getting into real estate to finally going on that big trip.
We can’t ignore the investment boom we’ve seen in recent years, as apps like Robinhood make it easier than ever to trade stocks. It will be worth paying attention to trading platforms to see if they attempt to target younger demographics, especially if the Supreme Court upholds Biden’s plan.
How Will Student Loan Forgiveness Impact The Stock Market?
Many experts wonder how student loan forgiveness will impact the stock market. During the pandemic, stimulus money partially funded the meme stock rallies. However, that doesn’t mean we should automatically assume student loan forgiveness will impact the stock market similarly.
How student loan forgiveness could help the stock market
With less money needed to repay debt, households could spend more on discretionary purchases. This could improve earnings for companies and boost investor confidence.
Another positive for the stock market could be that those who felt they couldn’t afford to invest due to monthly debt payments may have some freed-up money to put towards investing and planning for the future.
Why student loan forgiveness could have a minimal impact
Student loan forgiveness is different than receiving a stimulus paycheck. Having less debt doesn’t necessarily motivate someone to invest their money in the stock market like receiving a check might.
Financial relief could mean folks no longer have to scrape by or stress when paying for groceries and utilities. But whether they’d start putting money toward speculative assets doesn’t track for everyone.
Many who will benefit from the program may have paused debt payments since the pandemic. This could suggest spending habits won’t change significantly if a debt forgiveness plan goes into effect.
It’s also worth pointing out that the bottom 50% of American adults, in terms of income, own less than 1% of stocks. Theoretically, loan forgiveness could lead to poorer Americans having the financial bandwidth to invest in stocks, but whether they’d do so in practice remains to be seen.
Spending habits can be challenging to adjust. Whether a loan forgiveness program would make stock ownership in America more equitable is a question many have posed, but for which we’ll likely have to wait for an answer.
Student Loan Forgiveness vs. Stimulus
According to research from the Harvard Business School, an estimated $100 billion of the roughly $800 billion from the stimulus checks made it to the stock market. Though this may seem inconsequential within the capitalization of the whole stock market, it still represents small and unexpected shocks.
The government sent three rounds of stimulus checks where individuals received a total of $3,200 through a check or direct deposit into their bank accounts.
Student loan forgiveness would be different from stimulus money because it would relieve many Americans in dire need of financial assistance. President Biden’s plan currently targets poor and middle-class Americans, suggesting the money would mostly be used for necessities rather than investing in speculative assets.
The stimulus checks contributed to a surge in cryptocurrency and meme stock rallies. There was much more money in the markets, and predicting what would take off next was impossible. Student loan forgiveness would likely be more limited in its impact.
What’s Impacting The Stock Market Right Now?
Despite the potential positive impact of student loan forgiveness, we can’t ignore other factors that impact the stock market more. The biggest issue that has loomed over the stock market this past year is inflation, which has only recently subsided after the Fed’s most aggressive rate hike campaign in decades. These rate hikes undoubtedly hurt the stock market, as every announcement led to sell-offs and panic. Even companies with solid financials have felt pain since the rate hikes started.
Consumer spending habits are also changing as mass lay-offs in the tech industry and fear of recession encourage people to save.
Where Could The Student Loan Forgiveness Money Go?
With fewer debt payments, people will have more money to spend. This begs the question, what will people do with their extra money? Some estimates suggest that those with student debt forgiven will have an additional $150 to $300 in their monthly budgets.
Here are some possible options for where the student loan forgiveness money could go:
- Managing soaring inflation. Inflation is a natural part of the economic cycle and impacts the prices of everything from rent to utilities. A student loan forgiveness plan could offset the burden of higher prices caused by inflation, which will inevitably happen in the future.
- Paying off other debts. As helpful as the federal loan relief program would be, it’s important to remember that folks still have other types of debt (credit cards, car loans, and so on).
- Starting planning for retirement. For some, loan forgiveness could be the perfect opportunity to start planning for retirement.
- Investing. Many people felt like they couldn’t invest while still having student loans.
- Traveling. Some financial relief could lead to an increase in travel and international tourism.
- Purchasing real estate. Many recent college graduates have put off investing in real estate to first deal with making their student loan payments.
- Starting a family and settling down. Many young people have hesitated about starting families and settling down because of debt holding them back.
Only time will tell how borrowers would handle this kind of opportunity.
How Should You Be Investing?
If you benefit from the student loan forgiveness program, you may wonder how to invest your money to take advantage of this unique opportunity. If you’re new to investing, then it’s understandable you may have some concerns about the stock market right now.
Check out some of our other articles on investing and different financial products. Have a sense of your time horizon and risk tolerance, as well as how much money you’re ready to put into investing. Remember not to invest more than you’re prepared to lose.
Final Words
Federal student loan forgiveness would mean some borrowers can become debt-free and no longer be restricted by monthly payments. In other words, more money could enter the economy if people put aside less money to repay debt.
We won’t fully know how people invest their new money until a student loan forgiveness program is made active, but we can guess it would positively impact the stock market.
