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We May Have an Answer on Student Loan Forgiveness

Greetings all.  Bruce is on a well-deserved vacation this week, so I’ve been asked to share some thoughts.  Rest assured that we will return to your regularly scheduled programming next week.  I came to Harvest in June 2021 after spending seventeen years at Fidelity in a variety of roles.  I spend most of my time here working on financial plans and managing 401k accounts.

After nearly three years of suspended payments on federal student loans, the Biden administration announced on Wednesday that they plan to forgive up to $10,000 per borrower or $20,000 per borrower for those who received Pell grants with a taxable income of $125,000 or less for an individual or $250,000 for a couple.  Without getting political, this move is unlikely to contribute significantly to inflation in the near-term because those cash flows that were previously dedicated to payments have already been spent on other things.  A more likely scenario is that the additional free cash flow has a moderate inflationary impact.  CNBC ran a story in January 2022 stating that 56% of Americans can’t cover a $1,000 emergency from their savings.  The longer-term issue that this creates is how students in future years will finance their educations.  While one certainty in education is that costs will continue to climb for the four-year experience, this may be the tipping point that causes more students to take a hard look at if the price of the degree is worth it.

The war in Ukraine continues with the recent focus turning to the Zaporizhzhia nuclear plant.  As reported by the New York Times, fighting first broke out around the facility in March and happened again in April.  Now we see the armed forces back at it in the same area.  Hopefully, cooler heads will prevail.  As we’ve previously noted, one of the issues that are front and center in this war is the price Europe is now paying for allowing its energy reliance on Russia to reach such high levels.  While the global community wants to continue sanctions on Russia to penalize the Russian government, it must do so cautiously to avoid an even larger retaliation by Russia with the energy sanctions it can impose on Europe. We will need to wait and see how long these sanctions on Russia can last considering Europe’s energy needs.

We saw the Federal Reserve raise interest rates by .75% in July and with the next meeting scheduled for September, there is some debate about the size of the next raise.  These increases have certainly had an impact on the housing market by slowing transactions, but prices remain stubbornly high in many parts of the country.  We are seeing a similar slowing trend in car sales with 2022 numbers well below 2021 results, but this may be due more to lingering supply chain issues than financing concerns.  Looking at a few local dealership websites, I can confirm that the availability of new cars continues to be less than historical norms.  Shoppers may continue to experience the pleasure of buying the trim they didn’t want, in a color that wasn’t their first choice for a price they didn’t anticipate paying just to have the car that is available.

We also continue to monitor economic information and the GDP second estimate was reported this week for Q2 (-0.6%) vs the advance estimate (-0.9%) that came out last month.  This is quite normal to see revisions of government data and like other data points, this is something we will continue to watch.

In closing, I’ll leave you with my thoughts on where taxes are likely headed.  Spoiler alert: they’ll go up and not just income taxes.  Over the last few years, we have seen spending increase at a rate that can’t be supported by the current level of tax collections.  On balance, it’s more likely that taxes will go up rather than cutting spending, but I don’t expect that the increases will be called taxes.  My expectation is that these will be called ‘fees’ just like we see in how Scandinavian countries assess speeding tickets and shoplifting fines.  Finland in particular bases the amount of the fine in part on the declared income of the offender.  I can see this type of sliding-scale penalty system gaining in popularity.  Couple this with increased enforcement by federal and state agencies and you have a system that can extract more from citizens and residents. 

John M. Gehri, CFP®, ChFC®