How will Biden’s student loan plan impact inflation?
President Biden announced on Wednesday an executive order to cancel at least $10,000 in federal student debt per borrower and extend a payment freeze through the end of the year.
The plan has come under fire from some high-profile economists, including former Obama economic advisers Jason Furman and Larry Summers, who said that it will fan the flames of the nation’s 40-year high inflation.
Experts are divided over the inflationary effects of Biden’s plan. Most agree, however, that even if student loan relief does lead to higher prices, the change will be marginal.
While Biden’s order will likely give student borrowers a total of at least $300 billion in relief over a decade, most experts don’t believe it will ignite a surge of consumer spending akin to previous rounds of stimulus checks doled out during the height of the pandemic.
Billions of the forgiven debt may never have been repaid anyway thanks to delinquencies and expanded relief programs, experts say, and the spending unlocked by the relief will likely start with other debts and recurring expenses.
“That impact will be spread out over time, so I don’t think it’s going to be a massive sudden infusion in the economy,” said Kevin Miller, associate director of higher education at the Bipartisan Policy Center, a nonpartisan think tank, in a Wednesday interview.
“It’s possible that when millions of borrowers look at their balance sheets and see their balance drop, that we might get sort of an exuberant moment of spending and people celebrate, but I think it’d be really hard to predict how big of an impact that would be.”
What does student debt relief have to do with inflation?
Critics of the plan say that lifting student debt will enable borrowers to spend far more over a short period of time, driving up demand, and thus, prices. The Federal Reserve has been hiking interest rates in an effort to reduce consumer spending that fueled inflation higher than seen in decades.
“Pouring roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Jason Furman, a Harvard professor and former top economic adviser to President Obama, tweeted on Wednesday.
However, he added that price hikes resulting from increased demand would be “relatively small.”
The Committee for a Responsible Federal Budget, which advocates for deficit reduction, estimated that $10,000 in debt cancellation per borrower could add just 15 basis points to the inflation rate in the near term through a combination of higher demand and additional federal government borrowing.
Biden’s plan goes further than that by doubling the debt cancellation to $20,000 for Pell Grant recipients and proposing a new rule that would cut the monthly student loan payment in half for certain low-income borrowers.
“This plan is much more expensive than we were thinking, so its inflationary effects are going to be higher than we’ve been thinking. It’s going to more than wipe away all of the gains of the Inflation Reduction Act, which was going to push in the right direction in terms of inflation,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
MacGuineas added that Wednesday’s plan might spell bad news for future borrowers, arguing that it could prompt institutions to hike prices in anticipation of future debt cancellations, making higher education more expensive for younger generations.
“Ironically, this policy could be bad for the debt, bad for inflation and bad for the affordability of college,” she said.
‘Drop in the bucket’: Experts predict minimal inflationary impact
Researchers at the University of Pennsylvania’s Wharton School of Business estimated Biden’s initial proposal to eliminate up to $10,000 per borrower making less than $125,000 per year would add roughly $300 billion to the federal debt over the next 10 years. They plan to update their projections to include the additional $10,000 provided to Pell Grant recipients.
But Kent Smetters, faculty director of the Penn Wharton Budget Model, said the inflationary impact of that additional spending would be minimal.
“In terms of money in people’s pockets, [it’s] actually not that big relative to the size of the economy,” Smetters said in a Wednesday interview. He estimated the plan would add 0.1 percentage points to overall inflation — a negligible difference between the current annual inflation rate of 8.5 percent and the Federal Reserve’s annual goal of 2 percent.
“Over time, a very small amount of that gap would be impacted by this.”
Alí Bustamante, deputy director of worker power and economic security at the liberal Roosevelt Institute, said that the new spending freed up by Biden’s plan amounts to a small fraction of the trillions of dollars Americans spend every year.
“It really is just a drop in the bucket when you consider the broader economy,” he said. “And that’s assuming that everybody is just going to spend the money that they’re saving from navigating payments … we see that wealth and income constrained borrowers will ultimately use debt forgiveness to service other loans as well as increase their savings.”
In addition, Biden’s plan aims to lift the freeze on student loan payments at the start of next year, a pandemic-era program that some economists blamed for helping fuel red-hot demand.
Repayment restart will sap momentum
While millions of Americans will have their student debt balanced wiped out by Biden’s action, those with debt remaining must begin paying it back in January unless they are able to enroll in a different federal forgiveness program.
Experts say the resumption of loan payments for the first time since March 2020 will likely cause a pullback in spending that would sap momentum from rising prices.
“That leaves 30 million people who will see their household budgets change in January, so the end of the repayment is actually a much bigger deal than the forgiveness itself,” Miller said.
Advocates for student debt relief also argue that the growing threat of a recession — driven in part by the Fed’s attempts to fight inflation — make it essential to give borrowers a head start with payments resuming next year.
“If it is in fact the case that there is going to be a recession or that household budgets are now being weighed down more by inflation, the reasoning for the administration to improve people’s household, financial standing is only more sure,” said Ben Kaufman, research and investigations director at the nonprofit Student Borrower Protection Center.