After months of uncertainty, the Biden administration officially announced Wednesday that it will cancel up to $20,000 in student loan debt for many borrowers. Supporters took the move as a win that would help lift the burden of student loans for millions of people, including many of the neediest borrowers. But it’s also drawn criticism, including from economists who argue that loan forgiveness could worsen inflation during a time when prices are already climbing rapidly.
Larry Summers, a former Treasury secretary under President Bill Clinton,that student loan debt relief “raises demand and increases inflation.” Jason Furman, an economist at Harvard University and a top Obama administration economic adviser, : “Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless.”
Conservatives have also attacked the policy and said it would fuel inflation. Mitch McConnell, the Senate minority leader,would “give away even more government money to elites with higher salaries” rather than help working families who are struggling to keep up with rising prices.
Many economists say it’s plausible for the policy to increase inflation. If people have less student loan debt to pay off, that frees up a portion of their budgets that they would otherwise spend on their loans. That might make people more likely to purchase things like new couches or cars. And as demand increases and consumers spend more, that tends to drive prices up.
For now, that’s still hypothetical. Whether student loan forgiveness ends up driving inflation higher — and if it does, by how much — will depend on how people change their spending after their loan balances are reduced or wiped out entirely.
Will this make inflation worse? It depends on how consumers change their spending.
Much of this rests on how much loan forgiveness actually leads to an increase in consumer spending. The administration said it wouldper borrower and $20,000 for recipients of Pell Grants (borrowers are eligible if their individual income is less than $125,000 or under $250,000 for married couples). It also extended the repayment pause through the end of the year for the last time.
Nobody has been required to pay their student loans since the start of the pandemic, meaning that payments have been suspended and interest hasn’t accumulated, so people aren’t going to see the same immediate budget impact they would if they had been obligated to make payments.
Michael Pugliese, an economist at Wells Fargo, said he expected the policy to likely only have a marginal effect on inflation since borrowers aren’t actually gaining cash, but rather seeing an increase in their wealth. People might be inclined to spend more if they received a check in the mail or if their annual salary increased, he said, but it’s unclear how dramatically people would increase their spending if they had less student loan debt to pay off.
Economists at Goldman Sachs and Moody’s Analytics have also predicted that the policy will likely have a minor impact on inflation in the near term. “We would expect the effects on inflation to be similarly small,” Goldman Sachs economists wrote in a note on Thursday. “However, the end of the payment pause and the resumption of monthly payments looks likely to more than fully offset the small boost to consumption from the debt relief program.”
Pugliese also said it was unclear how big of an impact this would have on the total US economy, since the majority of Americans don’t owe student loans (roughly 43 million Americans have some federal loan debt).
Still, Pugliese said there were many unknowns and it was possible for the policy to have a more sizable impact on inflation if it significantly boosts spending among those experiencing debt relief. And he said that even a small bump in inflation isn’t so great, since prices are already up slower and more stable 2 percent annual inflation rate.)from a year ago, according to some estimates. (The Federal Reserve usually targets a
“Additional inflation when you’re already so, so high is a lot different than say, marginal inflation when it’s 1.5 or 2 percent,” he said.
Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget, said the administration’s student loan forgiveness would only put upward pressure on prices since it would lead to increased consumer spending. He noted, though, that it was unclear to what degree that will happen.
“With an already overheated economy, more spending is actually going to raise prices,” Goldwein said. “It’s going to raise prices on everything from clothing to gasoline to furniture to housing because there’s more money being spent versus being saved in the form of paying down your debt.”
An analysis from the organization, which advocates for policies that reduce the deficit, found that the administration’s debt cancellation and repayment pause extension would amount saved through the recently passed Inflation Reduction Act, the analysis found.over the next decade. The policy would likely cost more than double the
Some proponents of student debt cancellation argue that the policy would have no impact on inflation. Alí R. Bustamante, the deputy director of the Worker Power and Economic Security program at the progressive Roosevelt Institute, said that an increase in wealth might not lead to much higher spending since consumers are likely to use that money to pay off other debts. They could also use that money to build up their savings, as many households have done during the pandemic, he said.
“So many of these folks actually lack any considerable economic buffer,” Bustamante said. “When you just take into consideration the demographics of it, you can see that any kind of increase in spending is actually very small.”
Bustamante said the debt cancellation would provide some relief to Americans struggling to deal with inflation since it puts more money in their pockets and helps reduce the racial wealth gap, since Black students are much more likely to take out student loans and tend to borrow larger amounts. He also said it would help Americans who didn’t complete college, but still took on student loan debt.
But it remains to be seen how the Biden administration’s actions could influence people’s expectations for future debt cancellation.
Beth Akers, a senior fellow focusing on the economics of higher education at the conservative American Enterprise Institute, said that based on recent analyses, the policy would probably have a small impact on overall inflation. But she said she worried that students could expect more debt relief in the future, which could boost demand for college and the amount they’re willing to pay. That could then lead to higher education institutions driving up costs as a result of that increased demand, she said.
“Nobody really knows how strongly students will respond to the idea that there might be another cancellation in the future,” Akers said. “So whether or not this is inflationary for higher education specifically will depend on their perceptions of whether or not this is going to happen again.”