Pollack: Impact of Biden’s student loan forgiveness

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co | Rose Law Group Reporter

With the President’s announcement that $10,000 of student loan debt would be forgiven for each federal borrower (subject to certain income limits) there were a variety of opinions on the impact of the plan. Politically, Democrats generally liked the plan, Republicans hated it. It is a big number with estimates of the cost ranging between $200 and $300 billion. Even economists disagreed on what the effect would have on American consumers and the economy. The biggest threat is whether debt forgiveness would worsen inflation. Former U.S. Treasury Secretary Larry Summers wrote on Twitter that the student loan debt relief will put more money in people’s pockets, raise demand for goods and services, and ultimately increase inflation. It could also incentivize universities to raise tuition which would have an inflationary effect and encourage more borrowing by students with the expectation that even larger forgiveness packages would be forthcoming.

While these opinions are legitimate, many economists failed to overlook that student debtors already had more money in their pockets starting in March 2020 when President Trump put a moratorium on monthly payments. Interest on loans has also not accrued since that time. The Federal Reserve estimates that student loan debtors have accrued $200 billion in savings because of the moratorium. So, the impact of forgiving debt at this point has probably been already factored into the inflation rates we are currently experiencing. Mark Zandi, chief economist at Moody’s Analytics, suggests that any inflationary effect of the forgiveness plan would be offset by the resumption of student debt payments starting in January next year. In fact, because those payments are taking discretionary spending out of the pockets of debtors, the plan will restrain growth and have a disinflationary impact. In the end, Zandi and other economists believe the impact of the forgiveness plan is probably a wash (a technical economic term for zero impact).

A couple of other thoughts. One is the inherent unfairness of the plan that will not benefit:

  • Students who did the right thing and paid off their debt.
  • People in trade schools or apprenticeships who may not have any debt.
  • People who made the effort of reducing the cost of higher education by going to community colleges or working their way through school.

Lastly, no one is talking about the root cause of the student debt issue – the cost of college tuition that has risen well beyond the rate of inflation over the last 10 to 15 years. Many, but not all, colleges and universities looked at available loan programs as free money for their students. And many students were ignorant of the impact the loans would have on their future ability to live at a reasonable level, buy a home, or rent a decent apartment. Until we attack the true cause of the student debt issue, more loans will be issued, and total debt will continue to increase.

U.S. Snapshot:

  • U.S. GDP declined at a slower annual rate than previously thought. The second quarter GDP revised release saw a softer decline of 0.6% than the first estimate of 0.9%. Consumer spending was the primary reason for the upward revision. The growth rate remained negative for the second consecutive quarter, but strong employment and consumer spending suggests the U.S. economy has not dipped into a recession, yet. We will wait for the NBER to make an announcement, if necessary, when full data is available.
  • Personal income grew by 0.2% in July, up 4.6% from a year ago. Personal consumption expenditures were positive in July, with a modest increase of 0.1%. Consumer expenditures represent the largest contributor to GDP. It was a good start to the third quarter. Core-PCE (inflation measure) rose 0.1% and was up 4.6% for the year.
  • Consumer sentiment had a strong second half of the month in August, as the level increased 13% for the month to 58.2. The index has recovered from the June low of 50 but remains well below the 70.3 level seen last year. Consumers cited better expectations of the economy as the reason for the improvement. Inflation expectations a year from now dropped from 5.2% to 4.8%. The most visible cost of inflation – gas prices – have dropped precipitously over the past six weeks.
  • The more housing data becomes available, the gloomier the near-term seems for housing. The U.S. Census released their estimates for new home sales, and they were not bright. The seasonally adjusted annual rate dropped 12.6% and was down 29.6% from a year ago to 511,000 in July. That was the lowest rate since January 2016. The median price of homes rose to $439,000, but as buyers’ budgets continued to suffer, a pullback in prices is expected.

Arizona Snapshot:

  • Lodging occupancy declined in July for the second consecutive month. The pullback was driven by a drop of 4.3% in demand and an increase of 0.2% in supply.
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