How Us Debt-forgiveness Could Impact The Stock Market

The US government has recently announced a plan to forgive up to $10,000 of student debt per student in a decision that will impact millions of people throughout the country who are struggling to pay back their loans, particularly considering the ongoing cost-of-living crunch.

According to the Whitehouse, the plan will cost the government some $24 billion if three-quarters of that avail themselves of the scheme.

Follow up on pledge

Democratic President Joe Biden made the announcement on Wednesday, 24 August, following a pledge from his 2020 electoral campaign. US higher education fees are much higher than in many other countries, and the current student loan debt surpasses $1.75 trillion, with the government’s most significant chunk of it being held. The average cost of college tuition in the country is $32,769 per year, meaning bills of over $100,000 for many students.

Eligible individuals include those who earned less than $125,000 during the pandemic or a combined $250,000 for married couples.

The decision could have a positive impact on his party, with the congressional elections looming in November. But it is also likely to impact the stock market. 2022 has not been an easy year for the world’s stock and forex exchanges, with many big names suffering equally significant losses. The S&P 500 found itself amid a surprise bear market during the spring while inflation reached highs not seen in the last 40 years.

Experts believe that the freeing up of cash for thousands of Americans could provide a big boost to the economy. With loan forgiveness taking place on a large scale, individuals are more likely to borrow, invest, and just juice the market in general.

Good news for investors

This is potentially good news for those who invest in stocks, forex, crypto, indices, and other assets. There will likely be a knock-on effect on company assets related to insurance, education, and finance. Those who trade on platforms like the latest Meta Trader 5 will find themselves with plenty of options for investment and speculation across several markets that could be affected. The fact it is online also makes it easier for investors to stay on top of movements that are affected by developments, such as the debt-forgiveness announcement.

Meanwhile, inflation is likely to have a more significant effect on the markets as it plows through 9.1% earlier this month. Simply put, an increase in inflation will incite financial authorities to hike their interest rates, triggering a shift in assets from equity into debt. The higher the interest rate, the risk-reward rate will fall, and investors will also look to change their stances.

When interest rates are high, it becomes more expensive for companies to take loans, which see their capital costs to increase. This can have a knock-on effect by reducing the level of projected cash flows, which can see stocks be discounted and lower equity valuations.

The real size of the situation will be ascertained as we progress into winter amid rising fuel and energy prices and the implementation of the decision.