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Student Loan Cancellation Won’t Stimulate The Economy, According To New Research – Forbes

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Student loan cancellation won’t stimulate the economy, according to new research.

Here’s what you need to know.

Student Loans

Supporters of student loan cancellation say student loan cancellation is a perfect financial stimulus: cancel $50,000 of student loans, and student loan borrowers will have more money to spend on local businesses. Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have been vocal supporters of student loan cancellation as a means of financial stimulus. However, according to new research from the Committee for a Reponsible Budget, both total student loan cancellation and partial student loan cancellation will have a minimal effect on the economy. Here’s what they found:

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  • Total student loan cancellation: only $0.08 to $0.23 of economic activity for every dollar of student loans cancelled.
  • Partial student loan cancellation: $0.02 to $0.27 of economic activity for every dollar of student loans cancelled.
  • Student loan cancellation of $10,000: results in an economic multiplier of only 0.13x.
  • Student loan cancellation of $50,000: results in an economic multiplier of 0.10x.

This means that if you cancel all student loans, then only 8% to 23% of the amount of student loan debt cancelled would stimulate the economy. If you cancel some student loans, then only 2% to 27% of the amount of student loan debt cancelled would stimulate the economy.

3 Reasons student loan cancellation doesn’t stimulate the economy:

  1. Due to income-driven repayment plans, student loan cancellation has minimal impact on impact cash flow;
  2. Student loan cancellation is poorly targeted to those less likely to spend; and
  3. The current state of the macroeconomy given supply and demand constraints

Here are the details.


Student loan cancellation and stimulus

Here’s how much partial student loan cancellation would impact the economy, according to research:

Student loan cancellation: $10,000

  • completely eliminate student loans for 15 million borrowers
  • partially cancel student loans for 28 million would cost $210 to $280 billion.
  • would reduce annual student loan payments by $18 billion per year (after temporary student loan forbearance ends)
  • even after three years, the savings would be $54 billion, which is about 20% – 25% of the amount of student loans cancelled

Student loan cancellation: $50,000

  • completely eliminate student loans for 36 million borrowers
  • partially cancel student loans for 7 million would cost more than $950 billion.
  • would reduce annual student loan payments by $55 billion per year (after temporary student loan forbearance ends)
  • even after three years, the savings would be $165 billion, which is about 17% of the amount of student loans cancelled

Why student loan cancellation doesn’t really impact cash flow

According to the research, student loan cancellation doesn’t really impact cash flow. Here’s why:

  • $50,000 of student loan cancellation doesn’t mean that a student loan borrower now has $50,000 to spend in the economy.
  • Instead, a student loan borrower would save their student loan payment each month, which could range based on their student loan balance, but could be several hundred dollars (not $50,000).
  • Here’s a surprising statistic: nearly 50% of all student loan dollars are connected to non-repaying borrowers either in school, student loan delinquency, student loan forbearance (separate from the current temporary student loan forbearance ddue to the Covid-19 pandemic), student loan deferment or student loan default.
  • And among those student loan borrowers in student loan repayment, approximately 40% of the dollars come from income-driven repayment plans. Unless their student loan debt is completely or mostly cancelled, these student loan borrowers would continue to make student loan payments each month based on their income.
  • Almost 90% student loan borrowers in an income-driven repayment plan have student loan balances above $10,000, while approximately 40% have student loan balances over $50,000.

Biden has supported financial stimulus, but hasn’t cancelled student loan debt

President Joe Biden has been a proponent of stimulus to help Americans in the response to the Covid-19 pandemic. Through measures such as stimulus checks and enhanced unemployment benefits, Biden has championed providing direct checks to those most in need. The researchers found that “fiscal stimulus is most effective when it goes to those most likely to spend, such as individuals with low incomes or those who recently experienced a loss in income.” However, they argue that student debt cancellation does the exact opposite by distributing money mainly to those most likely to save and least likely to spend. How does student loan cancellation compare to stimulus checks and enhanced unemployment benefits? The researchers estimate savings from a student loan borrower having lower debt repayment will only be about 50% as effective at boosting demand as expanded unemployment benefits and 20% less effective than stimulus checks. “Given high levels of savings, massive stimulus in the pipeline, pent-up demand, supply constraints, inflation pressures, and expectations of a strong economic recovery, additional cash injected into the economy will have few places to go. To the extent that it leads to new spending – as opposed to saving – it is likely to result in additional inflation pressures (especially in the near term).”

As Biden and Congress debate the future of student loan cancellation, the good news is that Biden has cancelled $3 billion of student loans. It’s likely that Biden will continue to pursue targeted student loan cancellation, but there is no guarantee that there will be any wide-scale student loan cancellation. Therefore, make sure you have a clear strategy for student loan repayment. Here are some popular options:


Student Loans: More Reading

Is this a game changer for student loan cancellation?

Are you read to pay student loans again? Elizabeth Warren says your student loan servicer isn’t ready

Biden has now cancelled $40 billion of student loans this way

Biden may extend the student loan relief beyond September 30, 2021, even if unemployment benefits and the eviction moratorium end

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Economy

Bank of Canada walking a ‘tightrope’ as analysts forecast inflation jump in February

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Economists expect inflation reaccelerated to 3.1% in February

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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

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Article contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

‘Can’t afford missteps’: Desjardins Financial

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.

“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.

‘Inflict too much damage’: National Bank

The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.

They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.

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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.

Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.

The trio expect very tepid growth for 2024 of 0.3 per cent.

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Rising gas prices: RBC Economics

Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.

Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).

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Economy

China Growth Beats Estimates, Adding Signs Economy Gained Traction With Stimulus

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China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.

Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.

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China’s retail and industrial data lifts economy, but real estate drags

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Image for article titled China’s new retail and industrial data beat expectations — but signs still point to trouble ahead

 

 

Photo: Florence Lo (Reuters)

 

 

Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.

Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.

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Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.

“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.

China’s shaky domestic demand

Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.

Total outstanding yuan loans grew by 9.7% last month, a record low in data going back to 2003, according to Bloomberg. The sluggish borrowing demand comes even as the Chinese central bank made a surprise cut in the amount of cash that banks must hold in reserve, suggesting the stimulus measure has had little impact. And Beijing’s exhortations for unleashing “new quality productivity” (also translated as “new quality productive forces”) remains more rhetorical than substantive, particularly absent deeper structural reforms to the country’s economy.

With shaky demand at home, China’s bid to hit a GDP growth target of 5% this year will likely mean leaning heavily on its export machine. But that gambit will also face hurdles as governments, including the EU and Brazil, launch probes into China’s allegedly unfair trade practices. Separately, the U.S. is considering whether to investigate Chinese shipbuilding following a petition from major American labor unions.

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