Student loan forgiveness is good for investors. Here’s why.
Last week, the White House made an announcement that rocked the US economy; President Joe Biden plans to write off much of the student loan debt for many Americans. The three part plan focuses on forgiving $10,000 for borrowers in the low and middle class income brackets. Pell Grant recipients will also be eligible for up to $20,000 in student loan forgiveness. A statement released by the White House acknowledged that while the cost of higher education has skyrocketed, federal support has not kept pace. This news affects some 45 million borrowers whose collective student loan debt amounts to approximately $1.6 trillion.
A common concern expressed by politicians is that student loan forgiveness is unfair to many Americans who do not have a college degree or who have already paid off their loans. Others expressed concerns about rising inflation. Economist Lawrence Summers has also spoken out strongly against ‘Unreasonably generous’ student debt relief, calling it “spending that increases demand and increases inflation”. However, these critics ignore some conflicting evidence that canceling student loans leads to a more prosperous economy for everyone. In fact, loan forgiveness could potentially greatly benefit investors.
Let’s take a closer look at the bigger picture regarding student loan relief and economic growth.
What student loan forgiveness means for the economy
It doesn’t take much to realize that canceling student loans could benefit many Americans. The Associated Press recently reported that Americans with federal student loan debt have a “average balance of $37,667.” However, a third of these borrowers owe less than $10,000, while “half owe less than $20,000.”
Based on these numbers, it’s clear that the rebate will help ease the financial burden of student loan debt for millions of Americans. According NPRdebt owed by 20 million Americans will be completely forgiven. NPR adds that the White House “estimates 90% of debt relief [will] go to people earning less than $75,000 a year.
However the issue is turned, it is hard to ignore the fact that this policy will benefit the Americans who need it most. A study by the nonpartisan Center for American Progress (CAP) further supports this argument, pointing to the increased financial security student loan debt relief will provide many with:
“Targeted cancellation of student debt of at least $10,000 to help millions of Americans manage their budgets better, to build wealth and reduce racial wealth gapimmediately improving financial security and laying the foundation for faster upward economic mobility.
This brings us to another important point; easing the financial burden will help stimulate economic growth. Basically, the millions of Americans who will soon find themselves with less debt will have more money to spend. It frees people up to do things like buy houses, for example. According NerdWalletstudent loan debt affected the “debt ratio, credit rating and ability to save for a down payment” of a potential buyer.
CAP is not the only research organization arguing for the economic benefits of canceling student debt. The Roosevelt Institute also recently released a report explaining why forgiveness not increase inflation. In fact, the organization made this argument long before Biden announced the cancellation of student loans, touting the economic benefits. The organization recently noted:
“Properly measured, people haven’t spent wealth in this recovery; most have used this recovery to accumulate savings, and the cancellation of student loans would continue this welcome trend.
Overall, this issue needs to be looked at from a macro perspective. There is a valid argument that canceling student debt will provide more Americans with real financial stability. At the start of the pandemic, Covid-19 stimulus checks – which helped push up inflation – provided temporary relief. But student loan debt relief is a much more permanent solution for many.
With less debt, Americans will be more willing to spend money, which will benefit businesses in various sectors. Americans want to own homes and cars. Less debt means more incentives to invest in building the life they want.
At the date of publication, Samuel O’Brient held (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.