Student Loan Forgiveness Is Good for Investors. Here’s Why

Investors should take a macro perspective and look at the positives of student debt forgiveness

• President Joe Biden’s student loan forgiveness plan is generating plenty of controversy.
• Lawmakers on both sides of the aisle have expressed concerns.
• There is a strong case for why the measure makes sense for overall economic growth, however.

Last week, the White House made an announcement that rocked the U.S. economy; President Joe Biden plans to forgive a large portion of student loan debt for many Americans. The three-part plan centers around canceling $10,000 for borrowers in 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 rocketed, federal support has not kept pace. This news affects some 45 million borrowers whose collective student loan debt totals roughly $1.6 trillion.

As expected, this heavily partisan issue has been quick to ignite controversy. Many Republican lawmakers have called the plan “unconstitutional.” Even some Democrats have expressed contempt at the news.

One common worry voiced by politicians is that the student loan forgiveness is unfair to the many Americans who do not have a college degree or have already paid off their loans. Others have raised concerns regarding rising inflation. Economist Lawrence Summers also spoke strongly against “unreasonably generous” student debt relief, calling it “spending that raises demand and increases inflation.” However, these critics are ignoring some contradictory evidence that points toward student loan forgiveness leading to a more prosperous economy for all. In fact, loan forgiveness could potentially benefit investors in a big way.

Let’s take a closer look at the bigger picture concerning student loan relief and economic growth.

What Student Loan Forgiveness Means for the Economy

It doesn’t take much to realize that student loan forgiveness could benefit many Americans. The Associated Press recently reported that Americans with federal student loan debt have an “average balance of $37,667.” A third of those borrowers owe less than $10,000, however, while “half owe less than $20,000.”

Based on those numbers, it’s clear forgiveness will help ease the financial burden of student loan debt on millions of Americans. According to NPR, debt owed by 20 million Americans will be completely forgiven. NPR adds that The White House “estimates 90% of the debt relief [will] go to people making under $75,000 a year.”

Regardless of how the issue is spun, it’s hard to ignore the fact that this policy will benefit Americans who need it most. A study from the nonpartisan Center for American Progress (CAP) further supports this argument, emphasizing the increased financial security student loan debt relief will supply for many:

“Targeted student debt cancellation of at least $10,000 will help millions of Americans better manage their budgets, build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility.”

That brings us to another important point; easing financial burden will help spur economic growth. Basically, the millions of Americans who will soon be left with less debt will have more money to spend. That frees people up to do things like buy houses, for instance. According to NerdWallet, student loan debt affects a prospective homebuyer’s “debt-to-income ratio, credit score and ability to save for a down payment.”

The Bottom Line

CAP isn’t the only research organization arguing the economic benefits of student debt forgiveness. The Roosevelt Institute also recently published a report detailing why forgiveness would not raise inflation. In fact, the organization has been making this argument since long before Biden announced student loan forgiveness, touting the economic benefits. The organization recently noted:

“Properly measured, people have not been spending out of wealth in this recovery; most have used this recovery to build up savings, and student loan cancellation would continue this welcome trend.”

Overall, this issue needs to be examined from a macro perspective. There’s a valid argument that canceling student loan debt will provide more Americans with genuine financial stability. Back at the start of the pandemic, Covid-19 stimulus checks — which helped spike inflation — provided temporary relief. But student loan debt relief is a much more permanent solution for many.

With less debt, Americans will be more inclined to spend money, benefitting companies across a variety of sectors. Americans want to own houses and cars. Less debt means more incentive to invest in building the lives they want.

This post originally appeared at InvestorPlace.

On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Category: Personal Finance