Student loan forgiveness frees up money for millions of Americans

President Joe Biden.AP Photo/Evan Vucci

  • The Biden administration is preparing to offer $300 billion in student loans.

  • Unlike pandemic stimulus checks, retail investors are unlikely to use debt relief to rush into stocks.

  • Individual investors now have to contend with hot inflation and falling asset prices.

The US government’s $300 billion student loan forgiveness plan will provide financial relief to millions of Americans, but don’t expect a repeat of the “hardship” boom in retail investors who used pandemic stimulus checks to load up on stocks and cryptocurrencies, market experts said. Knowledgeable.

“I don’t expect it to spark a new meme-stock rally. These are monthly payments that will flow some assets into the market over time that would otherwise go to pay off debt. I don’t think there’s going to be a big wave of capital that will rush into the markets,” Richard Smith, CEO of RiskSmith, a risk assessment tool for retail investors, told Insider.

President Joe Biden recently outlined the program that cancels up to $20,000 for some federal student loan borrowers. More than 43 million people will be eligible based on income requirements.

“While the effects of the debt write-off may help rekindle interest in highly speculative assets such as crypto or meme stocks from younger generations, we believe the impact will be less than when the government stimulus checks were distributed Marco Iachini, senior vice president of research at Vanda Research, said in emailed comments. Vanda tracks US retail investment activity in individual stocks and ETFs.

Debt relief “will probably have a marginally positive impact on middle- and lower-income consumers in the long term, but is unlikely to have a material impact on the economy or the stock market in the short term,” said Ross Mayfield, investment strategist. analyst at Baird.

“Stimmy” phase.

Small investors stormed the stock market in 2021 as they drove huge gains in meme stocks including GameStop, AMC Entertainment and Bed Bath & Beyond. Many young people used incentive- or “crown” money to counter hedge funds shorting such stocks.

Applications for student debt relief will start in October and around 8 million people will be processed automatically. During the pandemic, the government sent out three rounds of stimulus checks, and individual taxpayers received a total of $3,200 between April 2020 and March 2021 via checks or bank deposits.

“These checks topped up cash accounts as soon as they landed in people’s mailboxes,” Iahini said. From an implementation perspective, borrowers may not see the impact until late 2022 or early in the first quarter of 2023, he said.

The average monthly student loan payment is about $400-$500, including private loans compared to a stimulus impact of $3,200 for each adult, Vanda said.

“Therefore, it will take about 6-8 months on average to achieve the same impact, while the eligible share of beneficiaries (% of the population) is smaller compared to the broad reach of the stimulus checks,” Iachini wrote.

About $100 billion of the total $800 billion in stimulus checks went to the stock market, according to a working paper authored by an economist at Harvard Business School and two economics professors at NYU’s Stern School of Business published in March.

The money found has boosted private investors with millions of them working from home or out of a job due to COVID. Alongside the meme stock craze, bitcoin climbed to a record high of over $68,000 in November 2021.

Inflation bites

But retail investors are in a different position compared to 2021, when the S&P 500 rallied nearly 27%. Shares have since plunged into a bear market. There has been a resurgence in meme stock activity led by Bed Bath & Beyond, but Vanda said speculative buying looks set to falter through the rest of 2022.

Inflation will be a major reason why many loan borrowers will not reallocate their debt payments to stocks or cryptocurrencies.

“In the last 12 months, the cost of everything else they buy has gone up – the cost of petrol, the cost of food, mortgage rates. So I suspect that some of that $300 billion will probably be used just to offset some of the cost of life increases,” David Sacco, an economist at the University of New Haven’s Pompea College of Business, told Insider.

“People are more sensitive to risk because they’ve been burned,” Smith said. “Bitcoin is gone [down] up to $19,000. A lot of risk bets that were very popular during the pandemic have gone down and people are underwater in those positions.”

Repayments on federal student loans will resume in January 2023. A March survey by Student Loan Hero found that 6% of respondents used pause repayment money to invest in the stock market, well below the 52% who used the money to pay for rent and other household expenses.

“I think that whatever [debt-forgiveness] The money going into the investment side of things will likely go into more traditional, safer investments,” Sacco said.

A chart shows rising retail participation in the stock market since the Covid era and two major spikes in net flows roughly coinciding with pandemic controls.

A Vanda chart shows rising retail participation in the post-Covid stock market and two major spikes in net flows roughly coinciding with pandemic controls.Vanda Research

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