How Student Loan Forgiveness Will Affect the Stock Market
Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
President Joe Biden was met with waves of excitement and criticism through the country Wednesday when he launched plans to forgive up to $20,000 in student loan debt for some borrowers. Now that millions of Americans are about to be less burdened with debt, it may be natural to wonder: Will some of that newly freed-up money find its way into the stock market?
Biden said he plans to use his executive authority to cancel $10,000 in student loan debt (up to $20,000 for Pell Grant recipients) for people whose annual income during the pandemic was under $125,000 ($250,000 for married couples). While the White House says millions of borrowers could qualify for forgiveness — that is, of course, if the plan goes through — experts say there likely won't be much impact on stocks.
The stock market had a rough start to the year after hitting record high after record high in 2020 and 2021. The S&P 500 fell into a bear market in June amid 40-year high inflation and the Federal Reserve's interest rate hikes to rein in rising prices. Stocks have rallied this summer (though they've trimmed some of those gains in recent days), and it's understandable to hope that more money in the hands of student loan borrowers could help juice the market.
But for those wondering where the market is heading, experts say it's probably best to keep your eyes on the Federal Reserve, whose decisions are likely to affect stocks a lot more than Biden's student loan forgiveness plan.
How will student loan forgiveness impact the stock market?
Student loan forgiveness is likely to have minimal impact on the market, says Lindsey Bell, chief markets and money strategist at Ally.
"If anything, I think there is a small opportunity for the measure to slightly boost consumer spending around the holiday period, which would be a positive for the market and the economy as the year closes out," Bell tells Money via email. "It removes an expense uncertainty for consumers who were anticipating the return of loan payments, just in time for the holidays."
Aoifinn Devitt, chief investment officer at wealth management firm Moneta Group, says the the impact of student loan forgiveness — plus the extension of the loan payment pause to the end of the year — will probably ease the pressure on consumers ever so slightly.
Student loan forgiveness also backs up recent progress we saw with the passing of the Inflation Reduction Act, signaling that the government is able to take effective action, as opposed to being stuck in gridlock, she adds.
"I don’t expect it to have a major impact on consumer spending or the stock market, but it is one piece of good news out there to combat the bad news," Devitt says of student loan forgiveness.
How will student loan forgiveness affect inflation?
What investors should really be focused on is any action coming from the Federal Reserve. The central bank has been raising interest rates to battle high inflation — a move it hopes will bring down spiraling consumer prices without tipping the economy into a major downturn. While rate hikes can help lower the price of goods, they can also crimp prices for financial assets like stocks.
Fed Chair Jerome Powell is expected to speak Friday morning at the Fed's annual Jackson Hole meeting. Investors will anxiously be awaiting a hint about whether or not the central bank plans to slow the pace of interest rate hikes.
Critics of student loan forgiveness say that cancelling debt could make inflation even worse than it is right now. But, as Money has previously reported, there probably won't actually be a major impact on inflation.
Many borrowers have not made a payment since March of 2020, Bell says, so the economy has already been feeling the impact of Americans having a reprieve from student loan expenses.
"This is different than a check being issued to consumers which can be spent immediately," she adds.
All of this means that investors are much more likely to react to the Fed's next moves, as opposed to the next step towards loan forgiveness.
Will this bring new investors to the market?
The boom in retail investing over the past two years — including the rise of meme stocks and cryptocurrency surge — has been attributed to a lot of factors. But one aspect that has regularly been mentioned is the introduction of stimulus checks during the pandemic. While they were promoted as funds to help Americans cover basic needs during trying times, the extra money was also used by many to invest in the stock market.
So will student debt relief have a similar impact on retail investing?
The funds retained by the student loan borrowers could be used for many different things, including investment in the stock market, says Robert Conzo, CEO and managing director at wealth management firm The Wealth Alliance. And since student debt impacts a majority of younger people, we may see an increase in trading platforms targeting that demographic, like Robinhood and Coinbase, he adds.
But again, student loan forgiveness is not the same as receiving a readily-spendable stimulus check. While the checks were a lump sum of money, debt cancellation is not. Most borrowers haven't had to make their repayments during the pandemic — so the sudden removal of some debt when loans are forgiven isn't going to give them an immediate injection of more cash.
More from Money:
Everything You Need to Know About Biden's Student Loan Forgiveness Plan
The Top Fear Investors Have Now Is Directly Related to Inflation