Could student loan forgiveness impact inflation?
(NEXSTAR) – Inflation is now at a four-decade high, and efforts by the Federal Reserve to curb it aren’t taming it thus far. Some fear an impending decision by the Biden administration regarding student loan forgiveness could only make it worse. But will it?
President Biden is expected to make a decision on federal student loan forgiveness within the next two months, according to reports. In April, multiple sources confirmed to The Hill that Biden was considering expunging at least $10,000 per borrower.
An analysis by the Federal Reserve found that sort of forgiveness would result in roughly 11.8 million borrowers – slightly more than 31% – having their entire balance eliminated. That would result in an estimated $321 billion in federal student loans being forgiven.
Some have argued student debt cancellation could lead to an economic boost, giving currently debt-burdened borrowers the opportunity to spend money on items they may have been holding out on, like a car or a house. That spending boost may not be ideal in the eyes of the Fed, which is trying to stabilize costs by making borrowing more expensive.
Still, some experts believe student loan forgiveness won’t have a large impact on inflation, including White House Senior Advisor Brian Deese. While speaking with reporters in May, Deese said that the economic impact of any student loan forgiveness proposal “would be across the course of years or a couple of decades.”
He added that the impact on inflation “in the near term is likely to be … quite small.”
Student loan forgiveness wouldn’t put money directly in borrowers’ pockets like stimulus checks, which were intended to be used for spending and stimulating the economy. Instead, forgiveness would either end or reduce the payments borrowers need to make on their federal student loans.
David Lazarus, business and consumer news contributor for Nexstar’s KTLA, agreed forgiveness would have a limited impact on inflation but noted that “it could affect the Fed’s efforts to cool the economy, which would create more urgency for further rate hikes.”
“Loan forgiveness could provide people with more disposable cash,” he explained. “While it’s not a certainty that people would go on spending sprees, it would allow for more shopping. That, in turn, would strengthen the economy, making it even more difficult to bring down sky-high consumer prices.”
In February, the Committee for a Responsible Federal Budget, a non-profit public policy organization, estimated canceling all of the $1.6 trillion in federal student loan debt held by Americans would increase the inflation rate by anywhere from 10 to 50 basis points, or 0.1 to 0.5 percentage points in the 12 months after repayment is scheduled to begin. The current U.S. inflation rate is 8.6%.
The Committee hasn’t released an estimate on how inflation would be impacted by forgiving $10,000 per borrower, but the organization continues to call both the payment pause and debt cancellation “regressive and inflationary.”
Payments on federal student loans remain paused until August 31. Biden could approve another extension on the payment moratorium in light of rising interest rates, and depending on the state of the economy in August, according to the Associated Press.
Since Biden took office, his administration has approved $25 billion in student loan forgiveness.
The Associated Press contributed to this report.