The Supreme Court struck down the Biden administration’s student loan forgiveness plan Friday.
While the bombshell ruling will undoubtedly be a blow to borrowers who had hoped — perhaps even expected — they’d have up to $20,000 of their student debt erased, the verdict is unlikely to be consequential for the U.S. economy at large, economists said.
“The Supreme Court decision to strike down loan forgiveness should have no meaningful impact on the economy,” said Mark Zandi, chief economist of Moody’s Analytics.
The fight against inflation gets a boost
It’s challenging to judge the economic effect of a sweeping policy such as student loan forgiveness.
If it had passed, it might have had a few broad, though marginal, effects on the economy, experts said.
For one, debt relief might have raised the standard of living for millions of households. With debt payments erased, consumers would have had more wiggle room in their budgets and would have pumped more money into the economy, economists said.
Estimates suggest consumers would spend about 3% to 6% of their increased wealth on new or accelerated purchases, according to the Committee for a Responsible Federal Budget.
That dynamic may have exacerbated inflation, said economists. Put another way, if consumers had more wealth — as much as $20,000 — to spend on goods and services, that may have served to prop up prices.
Overturning student loan forgiveness is therefore somewhat deflationary and means the Federal Reserve may not have to raise borrowing costs as much as it otherwise would if forgiveness succeeded, economists said.
Inflation has fallen significantly to a 4% annual rate from its 9.1% pandemic-era peak but remains elevated above the central bank’s 2% long-term target.
“This will work in the direction of further slowing consumer spending,” said Shai Akabas, executive director of economic policy at the Bipartisan Policy Center. “And that will directionally contribute toward the Fed’s goal of getting inflation back to its target level.”
Borrowers may cut back on purchases
Consumer spending is the lifeblood of the U.S. economy, accounting for about 70% of U.S. gross domestic product, a measure of the nation’s total economic output.
The Supreme Court’s ruling is unlikely to trigger a big pullback in household spending, in an aggregate sense, economists said. That’s because nothing much has changed relative to household balance sheets. They owed the debt before and still do today, Zandi said.
“I’m sure [those borrowers] who applied for forgiveness are disappointed, but I don’t think it’ll have any bearing on their financial situation, because nothing has changed,” he said.
However, the resumption of monthly student loan payments in October, after a three-year pause, will likely have a bigger effect. Moody’s estimates those payments to be about $275 a month for the average borrower.
But again, the effect of resumed payments will likely be muted at a macro level, economists said.
For example, more than 40 million Americans have student loan debt, while about 287 million do not, said Tim Quinlan, senior economist at Wells Fargo Economics.
Quinlan estimates resumed monthly debt payments for this group, in combination with the effect of the upended loan forgiveness plan, would reduce annual U.S. consumer spending 0.5%, at the high end of the estimate range.
“It barely moves the needle in terms of broad measures of consumer spending,” Quinlan said of the macro effect.
At a micro level, however, “it’s a big deal for the households that are impacted,” Quinlan said.
Recession fears remain
The timing of this expected spending pullback, however small, is precarious, economists said.
Many economists forecast the U.S. to enter a mild recession later this year or in 2024, due to factors such as higher interest rates and tighter lending standards after recent turmoil in the banking sector.
The concern is that the aggregate effect of student loan policies — a resumption of loan payments and overturned forgiveness — may incrementally “add fuel to the fire,” Quinlan said.
Federal data issued Friday suggests consumer spending has already slowed significantly.
That said, there are student loan policies that have already been enacted by the Biden administration that will likely help borrowers affected by Friday’s Supreme Court ruling, economists said.
For example, the Biden administration is giving millions of borrowers who defaulted on their student loans a “fresh start” by marking their accounts as current. The White House also rolled out new income-driven repayment plans to make payments more affordable.
“In theory, those policies should be helpful to those who’d be most impacted by this decision by the Supreme Court,” Akabas said.
More relief may be forthcoming. The White House said Biden, in a forthcoming speech Friday, would “announce new actions to protect student loan borrowers.”
“The script is still being written here on all of this,” Zandi said. “I’m not sure the Supreme Court’s decision is the final say on what happens.”
Source : CNBC
