What’s in the Student Loan Forgiveness Plan?

Dear Outsider,

America was founded on debt.

From 1703 to 1775, the 13 Colonies borrowed huge sums of money from the British.

At the time of the American Revolution, Colonial merchants and planters owed British creditors 5 million pounds.

While the colonists worked to build a “free market,” the British were embroiled in multiple wars, including the Seven Years’ War, which doubled the national debt and put a strain on the British economy.

This led to the British trying to recoup some of their losses in the form of heavy-handed taxes on the Colonies, including the Sugar Act, the Currency Act, the Stamp Act, and the Tea Act.

When the colonists revolted and declared sovereignty, British debt was largely ignored.

It was even illegal to repay these debts in most cases.

After the war, the British tried in vain to get back the money owed to the Crown.

It wasn’t until 1802 that Thomas Jefferson’s administration paid the British government a measly 600,000 pounds.

It was lucky to get anything at all!

Fast-forward to today, and the U.S. is once again in a debt crisis.

This time it’s with student loans.

But the day we’ve all been waiting for is finally here.

It’s like Christmas for people who don’t read the fine print...

Big Daddy Biden announced last week that he’s forgiving billions of dollars in student loan debt.

All said and done, the new student loan forgiveness plan immediately wipes out $300 billion in federal student loans.

For nearly one-third of borrowers, the plan erases all their financial obligations to the Department of Education.

The majority of Americans support the plan, but some are worried it’ll impact inflation and taxes.

Others think it sends the wrong message to younger generations.

So let’s break it down and try to get a better understanding of how this historic move will affect the economy and your finances.

We’ll even look at some companies set to benefit from the forgiveness.

A Timeline of Students Loans

In 1994, Congress created the first-ever income-driven repayment plan for student loans, which helped millions of people lower their monthly payments.

In 1998, the Teacher Loan Forgiveness Program was enacted as a way to alleviate the burden of debt on teachers who weren’t making a high salary.

Then the Department of Education started the Public Service Loan Forgiveness Program in 2007, which forgave loans for those working in nonprofits or other public service positions.

In 2011, student loans were brought to the public’s attention and deemed a “crisis” through the Occupy Wall Street movement, with many borrowers protesting about the greedy practices of lenders as total student loans reached the $1 trillion mark.

In the 2019 midterm election cycle, student debt forgiveness became a major topic, with Joe Biden promising $10,000 of student loan forgiveness per borrower.

When COVID-19 hit, student loan payments and interest were put on hold.

That’s when we knew something was going to be done about the crisis.

OK, So What’s the Plan?

First, Biden’s reducing the total loan amount by $10,000 for each borrower making less than $125,000 a year.

Pell Grant recipients get $20,000 taken off.

But this is a negligible amount of money.

The real power of this move is in the income-driven repayment (IDR) plans.

Anyone eligible for the new IDR plans will get their loans forgiven after 10 years of monthly payments, even if that payment is $0.

And the government will cover all interest payments under the new IDR plans.

Not only that, but you can also request a refund for any payments made during the pandemic payment pause.

This is essentially forgiving all student loans for lower- and middle-income Americans.

So where’s all that money going to go?

The stock market.

Welcome to the Roaring 2020s

Now, to pay for all this, Biden will either have to raise taxes or print more money, which will lead to more inflation.

But for now, things are looking pretty good for the 43 million Americans who hold student loans.

According to CNBC, roughly 9 million borrowers could have their balances completely cleared by the plan.

It's important because, according to think tank Third Way, the majority of college students don’t earn more than high-school graduates six years after graduating, making paying student loans incredibly difficult.

Now that these loans are basically gone, the U.S. economy can finally get the wheels turning again, starting with middle-income Americans.

And thanks to the American Rescue Plan, this debt relief will not be treated as federal taxable income.

It's free money... sort of.

According to Kiplinger, some states may tax the cancellation amount, so we'll have to wait until next tax season to see how this really impacts our state taxes.

Overall, this is a good thing, regardless of the heavy criticism.

What Companies Will Benefit?

I'm still bullish on lending companies like SoFi Technologies (NASDAQ: SOFI) and Rocket Companies (NYSE: RKT).

The market shed some gains last Friday, so look to refinancing and lending companies to pick up the slack next quarter.

The food industry is another sector that's poised for explosive growth.

That's because as inflation continues to rage, food prices have yet to come down.

But with all the freed-up cash out there from student loan forgiveness, it's creating a boon for food companies.

People are finally able to afford food again.

If you haven't looked into the market lately, I suggest you check it out.

Food makers like Tyson, Archer Daniels, and Darling Ingredients are going gangbusters.

My colleague Jason Williams says he's pinpointed the most important company in this red-hot market.

And I bet you've never heard of this stock.

Until next time...

Stay frosty,

Alexander Boulden
Editor, Outsider Club

After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.

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