Kristin Meyers, the editor in chief at TheBalance.com, joined Cheddar News to discuss what the student debt relief announcement from President Biden means for inflation and the credit scores of student borrowers. "This actually will end up boosting those credit scores of those that did receive that debt forgiveness because essentially their debt load is actually lowered," she explained. "And this is really important for those Americans that were really struggling to pay back some of that debt that maybe had lateness on their credit reports. Wiping off the debt is going to help them moving forward."

Opening Bell

Student Debt Relief to Boost Millions of Credit Scores

Joining us now is Kristin Myers editor in chief of the balance.com, thank you so much for being here. Let's start with that. How will the $10,000 forgiveness impact credit scores for those borrowers. Uh so interestingly enough, I'm sure as anyone who's watching this might actually realize when you actually pay off some debt, your credit score goes down just a little bit. Um and then it does actually pop back up. So this actually will end up boosting those credit scores of those that did receive that debt forgiveness because essentially their debt load, debt load is actual lowered. And this is really important for those americans that were actually were really struggling to pay back some of that debt that maybe had lateness on their credit reports, wiping off the debt is going to help them moving forward. Okay, so let's talk about the payment pause. How will another four months of that payment, paul's impact credit score for one of those borrowers. So this isn't going to so much impact the credit scores in terms of the pause because the pause essentially has said, you don't actually have to pay it back right now. It's like putting it in deferment or forbearance. And essentially when you're not paying it, the credit bureaus don't exactly count that as you essentially not paying your bills and being late. I will say, however, I think there's a lot of americans that might be earning over 100 and 25,000 or have a household income of more than 250,000 that are like you know, damn, I wish I had gotten that student debt forgiveness. But you raise a really good point. You get about four months right now of interest free loans that you are able to pay back. So this is a great opportunity if you are above that income threshold to really be able to chip all the way down at some of that debt because every dollar that you put down onto that student loan is actually going to take away the principal and not go towards any of the interest. That is a great point that I think a lot of people are missing that this is the time, but not just chill and be like, okay, I don't have to pay it but continue paying as much as possible while you have this little paws gap for yourself. So thank you for clarifying that. But let's look at the macro economics of this picture. How do you think that this pause and the forgiveness will really impact spending in our economy? Yeah, there's a really big question on this and the spending piece is really what's driving a lot of the inflationary concerns when it comes to the student loan forgiveness. Here's what we do know over the last two years that people have that have had this student loan repayment pause. They have gone and they have eliminated debt, whether it's credit card debt or another kind of debt. They've gone out and they've purchased homes, they've purchased cars. So there has been some spending, however, people are actually using this little bit of a breathing room that they're getting financially to really improve their financial future instead of going out and you know, buying more shoes or clothes or going traveling. So there is still a question about whether some of that spending will increase the disk discretionary spending for some of these borrowers that get this forgiveness and we do know that at least when it comes to the inflationary impact, they're going to be actually fairly marginal. Okay then. Well, how do you think that the pause and forgiveness will impact inflation? You mentioned inflationary concerns that a lot of people have right now? Well, it is going to impact inflation. We we can't deny that fact it is going to raise inflation but less than half of a percentage point. So it is going to be incredibly minimal. And you also have to remember that in essence, people haven't had to pay student loans, they've had student debt forgiveness for the past two years and the student debt forgiveness isn't exactly what fueled the inflationary crisis that we're in right now. Also remember that right now the Federal Reserve is doing everything that it can hiking interest rates to really bring that inflation down. So this in a weird way almost might be the best time to really try to have that upward inflationary pressure because we already have the wheels in motion to essentially reduce it on the other end. That's a good point. So do you think that those who are maybe benefiting from the forgiveness will have to write it off on their taxes this year? How will that all work out? So this is such a good question. They actually decided that this student debt forgiveness was going to be tax free because obviously if it was taxable income and usually canceling debt is considered taxable income, it would have a disproportionate impact on some of those borrowers that are lower income. However, the federal has said this is going to be tax free. That is not necessarily true for your state. So you might actually have to pay taxes on this, at least not on the federal level, but it might have to be on the state level. Also, then, in that case, there could be maybe some damaging consequences in the future for students and taxpayers as a result of this loan forgiveness. So what were we are seeing? They've already estimated that the tax bill at least on a state level might be around $2000. Now, if you've received upwards of $10,000 or even $20,000 of course, that's a very marginal tax bill, you still are receiving a huge benefit and boost there Now in terms of the cost to the other taxpayers actually, what we have from the inflation reduction act, which is supposed to reduce the deficit by about 275 300 billion. And that's actually where that savings is going to be coming from because doing this, we this income cap is actually going to cost the US economy about 300 billion. So essentially is canceling out the savings that we're getting from the inflation reduction act. And so for most taxpayers, they might not really be impacted at all. Okay, so I have a random question here for you, but I know some people that may have had a job that was paying 125,000 and now they don't or they're about to take another job. So they're like, let me hurry up and fill out the paperwork at what point do you have to have under 100 and 25,000 in your career? That is such a good question. They're going to have to check over at the White House for that student aid dot gov. Actually does have all of those details. There is a cap. I believe it's around the end of the year when that student at paws essentially is lifted but make sure to check with the White House on that one. Yeah, definitely check cause I know a lot of people like let me just quit my job for a month, my 10,000 and I don't think that is not a good idea. So anyone don't do that plan. Do not go that route, keep your job if you're earning more than 125,000, honestly, you're in the top 5% of income earners, you're blessed. Just take the four months of interest free loans and chip down at that loan. Okay. In that case, cheddar, I'll still be here tomorrow. All right. Kristin Myers editor in chief of the balance dot com. Thank you so much for that.