President Joe Biden’s move to forgive mountains of student loan debt may offset any inflation reductions from Democrats’ recently enacted Inflation Reduction Act.
The announcement this week that the administration is moving forward with canceling up to $20,000 of student loan debt for borrowers who earn below a $125,000 annual income threshold came as a relief to many, but it also may contribute to the already historic levels of inflation.
The move comes just weeks after Democrats and the White House hailed the passage of the Inflation Reduction Act, a piece of climate and tax legislation. Proponents argued that the bill would have deflationary benefits by slashing the deficit by some $300 billion over the next decade, according to scoring by the Congressional Budget Office.
Still, the CBO found that in its first year, the bill will have a “negligible effect” on inflation. The bill would also do very little to influence the inflation situation next year as well, according to the nonpartisan agency. In 2023, the bill is expected, in the best case, to alter inflation in a range of 0.1% lower — a relative drop in the bucket when considering prices are 8.5% higher than a year ago, according to the consumer price index.
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The new plan to cancel student loan debt, in comparison, would cost about $300 billion in the first year, according to the Penn Wharton Budget Model, hosted at the University of Pennsylvania’s business school. The plan would cost $329 billion in total over the next decade.
“So you’re looking at … a debt increase that would meet or exceed the expected deficit reduction from the Inflation Reduction Act. And so that’s problematic,” Garrett Watson, a senior policy analyst at the Tax Foundation, told the Washington Examiner.
Watson pointed out that the inflationary effects of student loan forgiveness might be more immediate than any disinflationary effects of the Democratic climate and tax legislation.
He said there will be an anticipatory response to the move, meaning that millions of people might begin to spend more in anticipation of getting $10,000 in debt offloaded.
Inflation is shaped by demand, meaning that when more people are going out and spending more money, prices are forced to increase in order to stay in balance with supply.
In theory, if millions of people feel as though they are now, or soon will be, $10,000 less in debt, they might choose to spend more money on other purchases of goods and services than they would had Biden not made the announcement, driving up prices.
Watson said he thinks people will start changing their behavior “as long as they’re confident this decision will actually stand up and be executed.” He said any minor benefit that the Democratic climate and tax legislation might have had on inflation would be undone by the student loan debt plan.
Jason Furman, the chairman of former President Barack Obama’s Council of Economic Advisers, postulated on Wednesday that the Biden student loan forgiveness plan could grow inflation by 0.2 to 0.3 percentage points — offsetting the Inflation Reduction Act’s inflationary effects as projected by the CBO.
“That is a relatively small inflation number. But would take about 50-75 [basis points] on the fed funds rate to extinguish that much inflation. Is the Fed going to try to offset this? Or will it do what it did with the American Rescue Plan and ignore that rapidly changing fiscal landscape?” Furman tweeted.
The Biden plan also extends the pause on student loan repayments until the end of the year — that comes after more than two years of such pauses. The Committee for a Responsible Federal Budget projected this week that, including the new plan, policymakers will have spent between $700 billion and $900 billion on student debt cancellation and relief since the start of the pandemic.
“This announcement is gallingly reckless — with the national debt approaching record levels and inflation surging, it will make both worse,” said Maya MacGuineas, president of the CFRB. “It could add twice as much to the deficit as was just saved from the Inflation Reduction Act, completely eliminating any deficit reduction and then some.”
The decision to extend the pause on payments continually for the past couple of years has driven up inflation, Patrick Gourley, an associate professor of economics at the University of New Haven, told the Washington Examiner.
“For a lot of borrowers, that is more than $10,000,” he said of the amount of debt that payments have been frozen on. “So when you look at the freeze on student loan repayments on top of the $10,000, now, you might be talking a significant inflation impact.”
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Still, the Biden plan is likely to face legal challenges, so its fate is far from certain.
If it ends up coming to fruition, to be eligible for Biden’s cancellation program, borrowers will need to earn under $125,000 individually or $250,000 as a household, and those who received a Pell Grant can have up to $20,000 canceled.
