The Biden administration has kept federal borrowers on their toes and waited until the eleventh hour to make a student loan forgiveness announcement. Their $10,000 student loan debt forgiveness plan was met with positivity and apprehension. Some lawmakers say a relief measure of this magnitude would contribute to record inflation as the economy reels from multiple interest rate hikes.
Would $10,000 of federal loan forgiveness per borrower be inflationary? Some experts say no, at least not for the foreseeable future.
Inflation and potential interest rate hikes are top concerns
President Biden’s student loan forgiveness proposal has been a politically divided topic down both aisles. On the one hand, progressive Democrats are calling for an immediate pardon of $50,000 per student, while Republicans have long argued that the president has neither the authority nor the means to enact such a measure.
As the US economy reaches high levels of inflation for a decade, the partisan divide seems to be deepening. Many Republicans cite concerns about the potential inflationary effect this broad forgiveness would have on the already short economy.
However, Mark Hamrick, Bankrate’s senior economic analyst and Washington bureau chief, is not convinced that a possible pardon measure would trigger a major reaction from the Federal Reserve. “I think it’s unlikely,” he said when asked if the Fed might be inclined to respond with aggressive monetary policy. “It’s a massive economy we have, and it takes a lot to move the needle when it comes to things like consumer spending and business spending.”
$10,000 in forgiveness is not enough to trigger economic change
President Biden has made it clear — both before and after his announcement — that he is against forgiving any amount over $10,000 per borrower. In this case, it’s more important to consider the impact the forgiveness would have on spending rather than focusing on the amount of debt forgiven, says student loan expert Mark Kantrowitz.
He breaks down the economic details by borrower, explaining that $10,000 in cash back equates to about $100 per month per borrower. The main concern is that borrowers will use this new money to buy big-ticket items, like cars or houses, which could then contribute to higher inflation.
Kantrowitz argues that many borrowers are unlikely to spend all of the canceled amount, but are instead more likely to use it to pay off other debts or bolster their savings; however, “the impact on the economy will be small anyway,” he added.
Betsy Mayotte, president of the Institute of Student Loan Advisors, echoes Kantrowitz’s statements, saying that about $100 of extra money a month is unlikely to allow most borrowers to make those big purchases, especially if they are already struggling to make their monthly payments.
“If they [the Biden administration] had to forgive everything [student loan debt], that would be a different story,” she says. “But I think everyone can agree that’s not on the table.”
Debt relief is more likely to impact ‘medium to long term’ borrowers
Canceling student debt, regardless of the amount, has the potential to increase the wealth of borrowers at all levels, as it frees up spending that would have been spent on debt. While lawmakers have expressed hesitation about pardoning because of this, an increase in wealth does not necessarily lead to an immediate increase in spending.
A 2022 Bankrate survey found that 59 percent of US adults with current or past student debt have delayed major financial milestones, such as buying a home or starting a family, because of their debt. Hamrick argues that canceling student debt will not allow these borrowers to take those financial steps immediately, but rather bring them closer together.
“It doesn’t mean they would be ready to buy a house in six months,” Hamrick says, referring to who would benefit the most from cancellation. “But that means the trip could happen faster than it otherwise would by less of a margin.
How Borrowers Can Better Prepare If Forgiveness Doesn’t Happen
With student loan policy still pending, it is important that borrowers prepare for repayment and not rely on potential legislation to take care of their balance. As the pause is extended until December 31, 2022, Mayotte is urging borrowers to get back into the habit of making monthly payments by repaying their interest-free loans or depositing the money in a high-yield or interest-bearing savings account .
“People underestimate how powerful the habit of making payment is,” says Mayotte. Borrowers can earn interest and make a lump sum payment towards the end of the payment pause if it is extended.
Possible cancellation to come with restrictions
While Biden debt relief program is currently on hold due to several trials, the administration imposed additional eligibility requirements for the pardon. In fact, before the program was announced, Mayotte said she would be surprised if the pardon did not come with limits. The administration has limited eligibility on annual income; to qualify for the $10,000 maximum, individual borrowers must earn less than $125,000 and joint depositors must earn less than $250,000. Those who have already earned a Pell Grant and meet the income requirements are eligible for a rebate of up to $20,000.
In light of the uncertainty surrounding forgiveness, it is more important than ever that borrowers are aware of all of their federal obligations. reimbursement options and benefits. To best prepare, borrowers can view their entire loan balance and perform a financial analysis. If monthly payments seem tight, there are alternative repayment plans and back-up options in case of difficulties provided by the education department.