Student Loan Forgiveness Won’t Trigger Stock Buys Like ‘Stimmy’ Money

  • The Biden administration is preparing to offer $300 billion in student loan forgiveness.
  • Unlike pandemic stimulus checks, retail investors are unlikely to use debt relief to rush into stocks.
  • Individual investors now have to deal with runaway inflation and falling asset prices.

The US government’s $300 billion student loan forgiveness plan will bring financial relief to millions of Americans, but don’t expect a repeat of the ‘stimmy’ boom of retail investors who used checks pandemic stimulus to load up on stocks and cryptocurrencies, market experts said. Initiated.

“I don’t expect it to trigger another rally in meme stocks. These are monthly payments that will allow some of these assets to flow into the market over time that would otherwise have gone to pay down debt. I don’t think there’s going to be a big wave of capital rushing into the markets,” Richard Smith, CEO of RiskSmith, a risk assessment tool for retail investors, told Insider. .

President Joe Biden recently outlined the program that waives up to $20,000 for some federal student loan borrowers. More than 43 million people will be eligible under the income requirements.

“While the effects of debt cancellation may help rekindle younger generations’ interest in highly speculative assets such as crypto or meme stocks, we believe the impact will be less than when distributed. stimulus checks from the government,” said Marco Iachini, senior vice president. president of research at Vanda Research, said in comments via email. Vanda tracks US retail investment activity in individual stocks and ETFs.

Debt cancellation “will likely have a mildly positive impact on middle- and low-income consumers in the long term, but is unlikely to have a significant impact on the economy or the stock market in the short term,” said Ross Mayfield, head of investment strategy. analyst at Baird.

Stimmy phase

Retail investors took the stock market by storm in 2021 as they generated huge gains in meme stocks, including GameStop, AMC Entertainment and Bed Bath & Beyond. Many young people have used the stimulus money — or “stimmy” — to fight hedge funds shorting those stocks.

Applications for student debt forgiveness will begin in October and about 8 million people will be processed automatically. During the pandemic, the government sent out three rounds of stimulus checks, and individual filers received a total of $3,200 between April 2020 and March 2021 through checks or bank deposits.

“These checks replenished cash accounts as soon as they hit citizens’ mailboxes,” Iachini said. From an implementation perspective, borrowers might not see the impact until late 2022 or early in the first quarter of 2023, he said.

The average monthly student loan payment is about $400 to $500, including private loans, compared to the stimulus impact of $3,200 for each adult, Vanda said.

“So it would take about 6-8 months on average to achieve the same impact while the eligible share of recipients (% of population) is smaller compared to the broad reach of stimulus checks,” Iachini wrote.

According to a working paper co-authored by a Harvard Business School economist and two finance professors from NYU’s Stern School of Business published in March, about $100 billion of the total $800 billion coming from checks from stimulus were funneled into the stock market.

The newfound money has energized retail investors, with millions stuck working from home or out of work due to COVID. Along with the meme stocks craze, bitcoin hit an all-time high above $68,000 in November 2021.

Inflation bites

But retail investors are in a different situation compared to 2021, when the S&P 500 jumped almost 27%. Shares have since plunged into a bear market. There has been a resurgence in meme stock activity led by Bed Bath & Beyond, but Vanda said speculative buying is expected to decline for the rest of 2022.

Inflation will be one of the main reasons that many borrowers will not reallocate canceled debt payments to stocks or cryptocurrencies.

“Over the past 12 months, the cost of everything they buy has gone up – the cost of gas, the cost of food, mortgage rates. So I suspect that some of that $300 billion will likely be used just to offset some of the rising cost of living,” David Sacco, a finance practitioner-in-residence at the University of New Haven’s Pompea College of Business, told Insider.

“People are more sensitive to risk because they’ve been burned,” Smith said. “Bitcoin went [down] at $19,000. Many risky bets that were very popular during the pandemic are down and people are underwater on those positions.”

Federal student loan repayments will resume in January 2023. A March survey by Student Loan Hero found that 6% of respondents used money from the suspended repayment to invest in the stock market, well below the 52% who used l money to pay rent and other household expenses.

“I believe that whatever [debt-forgiveness] money invested in investments will likely go into more traditional and safer investments,” Sacco said.

A chart shows increasing retailer participation in the stock market since Covid and two large spikes in net flows roughly coinciding with pandemic controls.

A Vanda chart shows rising retailer participation in the stock market since Covid and two large spikes in net flows roughly coinciding with pandemic controls.

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