As for the broader impact on the economy, the extended pause on repayments and overall lightened debt load will support consumption, but “it still comes down to how eager people will be to spend in the current environment of high inflation and rising interest rates,” said Sal Guatieri, senior economist at BMO Capital Markets. “The actions will temper the downside risks to the US economic outlook.”
While Biden’s plan to forgive a portion of student loans will reduce the burden for millions of households, it also pegs January as the end to the forbearance period. This means that millions of debt holders with more than $10,000 of loans or income levels outside of the government plan’s parameters will have to resume payments for the first time since March 2020, leaving less leftover for discretionary spending.
Student loan debt exceeds $1.7 trillion, according to the Fed, and is second only to mortgage balances as the largest component of US household debt.
Biden stressed that the plan is targeted toward working and middle class households. The $10,000 in debt relief for most student-loan holders will be doubled for those who received Pell Grants. More than 90% of those grants have gone to families with incomes less than $60,000 a year.
The loan forgiveness will have more of a long-term effect on household wealth, rather than an immediate effect on spending, said economist Arin Dube, professor at the University of Massachusetts Amherst. School debt often restrains first-time homebuyers, so eliminating the debt could free up spending in the future, he said.
“There are solid reasons to oppose the policy or support the policy,” he said. “But inflation to me is not a big part of the issue. This is transfer of debt from private to government essentially, and this is going to be spread out.”