Student Loan Forgiveness: Economists Drastically Disagree on Future Inflationary Effects
President Joe Biden announced his administration’s much-anticipated plan regarding student loan forgiveness on Aug. 24. However, economists’ views about whether the plan would further exacerbate inflation wildly differ.
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Under the plan, there will be up to $10,000 in federal student debt relief for most borrowers, up to $20,000 for Pell Grant recipients, as well as an extension of the student loan repayment pause — “one final time” to Dec. 31 — according to a tweet from Biden.
The Committee for a Responsible Federal Budget (CRFB) said in a recent article that the debt cancellation would wipe out the disinflationary benefits of the recently passed Inflation Reduction Act (IRA).
“Broad student debt cancellation — whether by extending the pause, forgiving balances, or both — would undermine the benefits of the IRA and demonstrate a lack of seriousness in addressing our nation’s economic challenges,” the CRFB wrote in the Aug. 16 commentary. “Cancelling $10,000 per person of student debt for households making below $300,000 a year would cost roughly $230 billion. Combined, these policies would consume nearly ten years of deficit reduction from the Inflation Reduction Act.”
On the other hand, the Roosevelt Institute argued that canceling student debt would not be inflationary, and that impacts on inflation would be small.
The Institute indicated that CRFB’s analysis “isn’t apples-to-apples and instead uses a budgeting convention for credit programs to distort the comparison.”
It argued that that in the CRFB’s own analysis, “any inflation from debt cancellation is small and more than offset by payments restarting.”
“Properly measured, people have not been spending out of wealth in this recovery; most have used this recovery to build up savings, and student loan cancellation would continue this welcome trend,” the Roosevelt Institute suggested. “Our work has shown that student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity — all without increasing inflation.”
Moody’s Analytics chief economist Mark Zandi also appeared to support the administration’s student loan cancellation plan, tweeting in advance of Biden’s announcement: “Some have expressed concern these moves will fan higher inflation. Not so. Just the opposite. The end of the moratorium and targeted debt forgiveness will result in the resumption of billions per month in student loan payments. This will restrain growth and is disinflationary.”
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