Student management

Imminent decision to forgive student debt raises fears of worsening inflation

Every element of broad student loan relief is up for debate, from how much to forgive to who should receive forgiveness. And right now, the impact debt cancellation could have on the economy adds another layer to the mix.

During the election campaign, President Joe Biden promised voters with federal student debt that they would see a $10,000 reduction in their balances — but it’s been more than two years and millions of borrowers are still waiting for that relief. The most recent reports suggest the president is considering a $10,000 rebate for borrowers earning less than $150,000 a year. According to researchers from

Federal Reserve

Bank of New York.

But with the United States facing high inflation for 40 years, this potential surge of new purchasing power from consumers who would instantly see their

net value

jumping thousands of dollars could drive up the cost of common goods and services even more. Prices rose 8.6% for the year to May, fueled by abundant consumer demand and woefully insufficient supply.

The possible inflationary spike gives the GOP a new talking point in the broad pardon debate. Forgiveness of hundreds of billions of dollars in debt, Republicans say, will only spur demand and exacerbate already stifling inflation, but Democratic lawmakers have stressed the need for relief and the economic stimulus it would bring.

The Biden administration is working on a pretty tight schedule. The freeze on student loan payments is set to expire after Aug. 31, and many lawmakers and advocates fear payments could resume before any broad relief is fully implemented.

For the White House, however, resuming payments after canceling some student debt may be necessary to combat rising inflation.

Jared Bernstein, a member of the White House Council of Economic Advisers, previously told The New York Times that “the key economic fact here is that if the restart of debt payment and debt relief were to happen shortly Near the same time, the net inflationary effect should be neutral.”

Those who oppose the pardon are also pushing for an undoing of the payment freeze, arguing that the end of the pandemic-era policy could further chill demand as Americans redirect their budgets to such payments.

House Education Committee Republican lead Virginia Foxx has repeatedly criticized the idea of ​​a broad student loan forgiveness and continued payment suspensions, citing the $150 billion cost to taxpayers that accompanied Biden’s latest suspension extension and the potential inflationary impact further relief would bring.

“Taxpayers have been footing the student loan bill for graduate students and Ivy League attorneys to the tune of $5 billion each month as their wallets are emptied by soaring inflation,” previously reported. Foxx said.

The Committee for a Responsible Federal Budget – a conservative think tank – also wrote in a report that widespread student debt cancellation is bad economic stimulus, pumping $90 billion a year back into the economy while costing US about $1.5 trillion in uncollected loan repayments. .

Canceling student loans ‘could be good for the economy’

Still, as Insider reported, some experts believe broad relief is something the government can afford to implement.

Marshall Steinbaum, an economics professor at the University of Utah, has previously said the economy is doing “more than fine” without paying off student debt, and some in the Biden administration see a clear upside to going forward with forgiveness efforts. Treasury Secretary Janet Yellen said such a move “could be good for the economy” by removing a “substantial burden” from the financial lives of millions of Americans.

While it looks like Biden is planning to restart student loan payments on Sept. 1 to ease inflation concerns, it’s still unclear if even that will happen. Education Secretary Miguel Cardona recently said another extension of the pause was out of the question, and supporters argue that a continued freeze – and broad debt forgiveness – could help borrowers cope with the rising prices that are depleting their wallets at the moment.

“We urge your administration not to threaten the financial security of people in debt as a tactic to fight inflation,” nearly 200 organizations, including the NAACP, wrote to Biden recently. “Instead, our organizations urge you to adopt strong student debt forgiveness that is not means-tested or require an opt-in for participation and to fully implement this policy before the due date of any student loan bills.”

Whether forgiveness exacerbates inflation or not, it’s up to the Fed to slow the price spike. Authorities have already raised interest rates at the fastest rate in nearly three decades in hopes of closing the gap between supply and demand. Chairman Jerome Powell stressed the importance of cooling inflation during a panel hosted by the ECB on Wednesday, saying there was “a ticking clock” before the faster price growth becomes permanent.

Yet despite all the rhetoric about forgiveness posing a new inflation risk, the central bank avoids taking sides on the issue. Asked by Republican Rep. John Rose of Tennessee whether canceling student debt would worsen inflation, Powell deferred, leaving the potentially risky decision up to the Biden administration and Congress.

“I’m going to let the CBO score, as well as the Office of Management and Budget,” Powell said during the June 23 hearing. “To be independent, we have to be out of these very difficult tax issues, which are really your job.”