Critics Fear Inflation As Biden Forgives Millions Of Student Loans

WASHINGTON – President Joe Biden announced on Wednesday that the federal government will forgive $10,000 in student loan debt for millions of debt-ridden former college students, fulfilling a pledge he made during his 2020 presidential campaign.

The move may boost support for his Democratic colleagues in the November congressional elections, but some economists warn that it may fuel inflation, and some Republicans in the United States Congress question whether the president has the legal authority to cancel the debt.

According to economists, debt forgiveness will free up hundreds of billions of dollars for new consumer spending on home purchases and other large-ticket items, adding a new wrinkle to the country’s inflation fight.

The actions are “for families that need them the most – working and middle-class people who have been hit especially hard by the pandemic,” Biden said at the White House. He promised that no high-income households would benefit, addressing one of the plan’s main criticisms.

“I will never apologize for helping working Americans and middle class, especially not to the same folks who voted for a $2 trillion tax cut that mainly benefited the wealthiest Americans and the biggest corporations,” Biden said, referring to a Republican tax cut passed under former President Donald Trump.

Borrower balances have been frozen since the beginning of the COVID-19 outbreak, with no payments required on most federal student loans since March 2020. Many Democrats had pushed for Biden to forgive as much as $50,000 per borrower.

Republicans mostly opposed student loan forgiveness, calling it unfair because it will disproportionately help people earning higher incomes.

Biden’s Student Loan Socialism

“President Biden’s student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt,” Senate Minority Leader Mitch McConnell said Wednesday.

The administration has yet to determine the price tag for the package, which will depend on how many people apply for it, White House domestic policy adviser Susan Rice told reporters. Student loans obtained after June 30 this year are not eligible, she said.

White House Press Secretary Karine Jean-Pierre told reporters the administration has legal authority to forgive the debt under a law allowing such action during a national emergency such as a pandemic. Earlier, Republican U.S. Representative Elise Stefanik had called the plan “reckless and illegal.”

American university tuition fees are substantially higher than in most other rich countries, and U.S. consumers carry $1.75 trillion in student loan debt, most of it held by the federal government. Biden said other countries could bypass the United States economically if students are not offered economic relief.

Pandemic Pause, Pell Grants

The administration will extend a COVID-19 pandemic-linked pause on student loan repayment to year end, while forgiving $10,000 in student debt for single borrowers with annual income under $125,000 a year or married couples who earn less than $250,000, the White House said.

Some 8 million borrowers will be affected automatically, the Department of Education said; others need to apply for forgiveness.

The government is also forgiving up to $20,000 in debt for some 6 million students from low-income familieswho received federal Pell Grants, and proposing a new rule that protects some income from repayment plans and forgives some loan balances after 10 years of repayment, the Education Department said.

A New York Federal Reserve study shows that cutting $10,000 in federal debt for every student would amount to $321 billion and eliminate the entire balance for 11.8 million borrowers, or 31% of them.

Inflation Impact

A senior Biden administration official told reporters the plan could benefit up to 43 million student borrowers, completely canceling the debt for some 20 million.

After Dec. 31, the government will resume requiring payment on remaining student loans that were paused during the pandemic. The official said this would offset any inflationary effects of the forgiveness. Payment resumptions could even have a dampening effect on prices, the official said.

Former U.S. Treasury secretary Larry Summers disagreed. He said on Twitter that debt relief “consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.”

Similarly Jason Furman, a Harvard professor who headed the Council of Economic Advisers during the Obama administration, said debt-cancellation would nullify the deflationary powers of the Inflation Reduction Act. “Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” he said.

Moody’s analytics chief economist Mark Zandi sided with the White House, saying the resumption of billions of dollars per month in student loan payments “will restrain growth and is disinflationary.” – Reuters

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