SDSU experts: Student debt forgiveness success rides on consumer spending shifts
How would spending change if student debt was forgiven?
Increasing talks on a proposal to forgive student loans has perked the ears of many college graduates that are financially restricted with monthly payments or are constantly searching for a lower interest rate in order to pay bills during the COVID-19 pandemic. Meanwhile, the notion of such an idea draws the ire of many fiscal conservatives.
A coalition of Democrats led by U.S. Sen. Elizabeth Warren and Senate Majority Leader Chuck Schumer are proposing incoming President Joe Biden use an executive order to cancel $50,000 in student loan debt per person as an avenue to stimulate a downtrodden economy.
While the only way to truly rejuvenate the economy is the end of the pandemic, such a stimulus plan is unknown and its effectiveness hinges upon consumeristic habits that prop the United States economy.
“The premise is the individuals that have this debt tend to spend,” said Joseph Santos, a South Dakota State University professor who specializes in monetary and financial economics. “They’re young, early in their career and larger portions of their income goes to spending. If you provide them the relief of student debt, they would perhaps spend it in these times. It doesn’t create stuff, but when you have stuff created and you’re dealing with a pandemic-induced recession, getting folks to spend can be stimulative.”
Despite the Dow Jones reaching all-time highs in November, the stock market is not the sole judge of the quality of an economy. In 2016, the Federal Reserve Board conducted a study that found 51.9 percent of American households had some form of investment in the stock market, but 1/3 of families in the lower half of the income scale held stocks, compared to 90 percent of the top-10 percent in income.
Gross Domestic Product is often seen as a more encompassing sign of the economy and numbers increased 33.1% in the third quarter of 2020 after plummeting 31.4% in the second quarter due to the pandemic, according to the Bureau of Economic Analysis.
Disposable personal income also dropped 13.2% -- $636.7 billion -- in the third quarter, while personal saving was $2.78 trillion in the third quarter after being $4.71 trillion in the second.
“The stock market is pretty disentangled from the economy,” said Zhiguang Wang, a South Dakota State University professor of business finance and investment analysis. “It’s related, but it’s not exactly moving in lock-step. The stock market tends to be an indicator of the economy much ahead of time. You can see the stock market rebound very quickly, very sharply and way ahead of the economy. … The economy isn’t what we’d like it to be, but it’s actually getting much better.”
Shift in spending
Nearly 45 million Americans hold $1.6 trillion in student debt, with the average student having $25,000 in loans and the average monthly payment sitting between $200 and $300, according to the Federal Reserve.
With the Bureau of Labor Statistics claiming 6.9 million people were unemployed in October, spending has decreased. Proponents of forgiving student debt believe money will be reallocated from paying lenders to purchasing consumer products, giving the economy a short-term boost until the pandemic ends.
“Spending is not a way to innovate, become more productive, to increase the capacity of the economy in the long run,” Santos said. “In the long run, you want individuals to be motivated, to take risks, to invest, to study and you want institutions and judicial systems to be fair. In the short run, spending your way back up to potential output is prevailing output. It’s not so much that you have to create more supply, it’s that you have to get demand back.”
The hitch is the assumption that consumerism in the United States will return rather than people continuing to maintain strict budgets due to the downfall of the economy. Regardless, the type of products purchased are likely to change post-pandemic.
Retail businesses could undergo an overhaul after months of people purchasing goods online from their homes.
“Spending will likely take different forms going forward,” Santos said. “Our consumer habits will force the production side of the economy to readjust itself. … Will we shop in malls? We were doing a lot less of that before, but we’ve been doing it a lot less since. There are realizations where it’s not just COVID, it’s never coming back. That can create workforce shifts. It’s not the same people, it’s not the same jobs and it’s not the same sectors that are dominant anymore.”
Some signs of a shift in spending has already shown, as commercial real estate has taken a hit as more Americans than ever are working from home. In return, it has given a boost to the housing market.
Home prices have never been higher, as the median single-family home rose 12 percent from a year ago to $313,500 in the third quarter of 2020, according to the National Association of Realtors. A family would need to pay $1,059 per month in mortgage payments and earn more than $50,000 to do so.
But record-low mortgage rates and people no longer tethered to office jobs in cities are flocking to less-populated suburbs, where they can work from home and reduce fear of COVID-19.
“Those with assets and housing real estate benefited from the market dipping and rebounding very quickly to reach an all-time high,” Wang said. “Those low-income people who do not have assets did not benefit much, if at all, from the market rebound. In a sense, the rich are getting richer, but those who are behind did not benefit from the rising of the equity market.”