While the data suggests that the biggest beneficiaries would be “middle class” income segments, the proposed action is actually expected to have the biggest impact on debtors with the smallest amount of federal student loans. The more education one has, the higher the debt load tends to be. For instance, to obtain a “basic” medical degree, about $200,000 in loans are availed on average. For people with larger debts qualifying for the program, their total debt servicing payments are scheduled to increase substantially once the moratorium on loan payments originally applied during the pandemic is lifted. It should be noted that, during this period, interest accruals
didn’t stop.
While there has been a lot of noise in the media about how this could either vastly improve personal savings or create extra inflationary pressures on the government, the markets seem to have largely shrugged off the proposed plan’s effects in its present form. As per Goldman Sachs economists Joseph Briggs and Alec Phillips, the following points bear keeping mind:
If all borrowers eligible for the program enroll, student loan balances would reduce by around $400 billion, or 1.6% of GDP. This is more or less in line with the Penn Wharton Budget Model’s findings. Of course, historically, no federal assistance program has ever had full enrollment.
While lower-income households will see the largest proportional cut in debt payments, most of them don’t have student debt. Middle-income households will benefit the most but the sum effect is only $10,000.
Loan payments will fall from 0.4% of personal income to 0.3%.Goldman Sachs estimates only a 0.1% point boost to the GDP in 2023 with smaller effects in subsequent years.
While “debt forgiveness” with lower monthly payments is slightly inflationary in isolation, the resumption of payments is likely to more than offset this.
The cut in the size of many borrowers’ monthly payments when they resume in January would increase household disposable income while increasing the federal deficit. For instance,When payments resume in January, payments will increase by around $35 billion on an annualized basis instead of $55 billion.
The sum total of effects would lead to the deficit increasing by roughly $400 billion over the next two years. However, since the government has already funded those loans from its coffers, there will be no substantial impact on Treasury issuances.
As of at the time of writing, the US market is being tested for new lows. Ed Clissold, chief U.S. strategist at Ned Davis Research mentions in his note dated August 31: “Recession fears are the most likely trigger of a retest of the June lows. From a seasonality perspective, a retest could come in the next several weeks.” Vanguard Group reported on September 1 that it’s downgrading its forecast for U.S. economic growth for this year after two straight quarters of contraction. The firm now expects economic growth between 0.25% and -0.75% for 2022, down from its estimate last month of about 1.5%.
The modest boost in personal savings seemingly promised via the US Student Loan relief measures wouldn’t be enough to turn this sentiment around. The fundamental problem with the US college debt situation is the cost of education and not the debt availed. If the former wasn’t so high, the latter wouldn’t be an issue. While the proposed measures do bring some relief to a large number of people, said relief is quite limited. The fundamental problem continues to receive no reprieve in the compromise-driven corridors of power in Washington DC.
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