The Supreme Court has ruled that President Joe Biden’s plan to forgive up to $20,000 in student loan debt per borrower was beyond the scope of the Administration’s authority.
With the promise of debt forgiveness no longer on the horizon, it’s essential to consider the impact of having student loan forgiveness taken off the table.
This guide will explain what the Supreme Court student loan forgiveness decision could mean for the economy as a whole.
Here is the possible impact of the Supreme Court student loan forgiveness decision
The effect of student loan forgiveness on the economy may be insignificant because many people do not have student loan debt and would thus not have been affected by loan forgiveness.
While approximately 40 million people across the United States have student loans, a far more significant majority — 287 million — don’t have any educational debt. As a result, only a tiny percentage of the population would have been left with extra money if the Supreme Court student loan forgiveness decision had gone another way.
But, while the impact of overturning student loan forgiveness may only be minor, wiping away loans could have some consequences specifically related to inflation and economic growth. This is especially true when coupled with the student loans restart.
Student loan payments have been paused — and interest has not been accruing — since the start of the pandemic when Congress provided debt relief, but interest will begin accruing in September and payments will restart in October.
Many people not repaying their loans will have to start again — and loan forgiveness will not offer them a reprieve.
The Impact of the Student Loan Forgiveness Ruling on Inflation and Interest Rates
It’s natural to assume negative economic impacts from ruling against student loan forgiveness. However, that is not necessarily the case regarding some critical aspects of the economy — specifically, interest rates and inflation.
The Supreme Court student loan forgiveness decision could have positively impacted the economy concerning inflation. That’s because costs have surged post-pandemic, forcing the Federal Reserve to raise interest rates to combat record-high price increases.
Passing student loan forgiveness would have left millions of households with more money to spend. However, it could have driven up demand and caused prices to climb even further.
With the student loan restart and forgiveness not moving forward, many people will have less money than more, as they would have had their debt wiped away. Less money could have a deflationary effect, potentially prompting the Federal Reserve to stop raising rates. That could be good news for borrowers contending with high-interest costs.
The Impact of the student loan forgiveness ruling on buying power
While the effects of student loan forgiveness on the inflation rate may be positive, there are ways in which the court striking down loan forgiveness could negatively impact the economy.
Specifically, the millions of borrowers who will not have their loans forgiven, and will instead need to begin making payments, will have less purchasing power than they would have had their debt been wiped clean.
Since consumer spending is the key driver of the nation’s growth, this could have an adverse impact on the GDP. If the GDP declines, that has widespread economic ramifications as the country could be thrown into a recession.
Most experts do not believe canceling student loan forgiveness will substantially impact the GDP for two significant reasons.
One reason is that people’s situations have not fundamentally changed due to the Supreme Court’s decision on student loan forgiveness. The borrowers aren’t receiving new debt — they just have the same debt they always had.
Another big reason the economic impact of canceling student loan forgiveness will be minimal is that more people need to be affected by the student loan restart or lack of forgiveness. A minority of the population has student loans and the majority without educational debt won’t affect their spending.
Understanding the Economic Impact of Student Loan Forgiveness
Ultimately, the economic impact of student loan forgiveness will not be substantial. Still, it is possible that the GDP could decline very slightly and that the inflation rate could also decline very slightly. So, the news is both good and bad.
While the economic impact on society won’t be profound, the effect on each individual household could be. Many people who had payments paused may find that the student loan restart hurts their monthly budget and spending ability. Those hoping loan forgiveness could be the answer have now been disappointed.
Any borrower worried about being able to afford payments once they resume should begin exploring their options now.
Those with federal student loans may be able to change to an income-driven payment plan that caps their monthly costs. And, while private loan payments were not paused, people with private student loans may wish to look into refinancing to reduce their interest rate and potentially their monthly payments and total borrowing costs.
By exploring these options, borrowers can minimize the impact of student loan forgiveness ending and the impact of the student loan restart on their personal bank account.
Source link: https://www.elfi.com/what-does-the-supreme-court-student-loan-ruling-means-for-the-economy/ by Lucy Reddick at www.elfi.com