How Biden’s Student Loan Plan Will Affect US Economy, Inflation

President Joe Biden’s student loan plan is a potential game-changer for debt-ridden Americans.

Biden announced Wednesday that the administration will allow $10,000 to borrowers earning less than $125,000 a year. Low-income borrowers who go to college with Pell Grants can get up to $20,000 in student loan forgiveness.

This debt relief will give tens of millions of borrowers a breather at a time when the cost of living is skyrocketing.

Importantly, the cancellation of student loans is paired with plans to lift the freeze on federal student loan payments beginning in January 2023. This means that many Americans who haven’t had to pay back their student loans since March 2020 will now have to start paying them back. So it eats into their cash flow.

Despite fears that Biden’s student debt relief will accelerate already devastating inflation, economists say the compounding impact on the broader economy will be minimal.

“The end of the moratorium will weigh on growth and inflation, while debt forgiveness will support growth and inflation,” Mark Zandy, chief economist at Moody’s Analytics, told CNN. “These cross-current nets are largely washed away.”

Together, Moody’s estimates that these effects will reduce real GDP in 2023 by 0.05 percentage points, unemployment by 0.02 percentage points, and inflation by 0.03 percentage points. So it’s a very small effect.

“We’re not talking about raising or lowering inflation by a percentage point or half a percentage point. We’re talking about a very small impact,” CNN said. phone interview. “But for individuals, this makes a big difference. It makes more than half of borrowers’ debt go away. That’s a big deal.”

Tens of millions of borrowers affected

A typical college student with loans graduates with nearly $25,000 in debt, according to a Department of Education analysis cited by the White House.

According to the White House, up to 43 million borrowers will receive relief from Biden’s student loan plan, including eliminating the remaining full amount of about 20 million borrowers.

If Mr. Biden didn’t impose an income standard on debt forgiveness or listened to calls from some progressives to wipe out the $50,000 student loan, the impact of inflation would be negligible. would have been even bigger.

Mr. Baker praised Mr. Biden’s plan as a “good compromise” that avoided extremes.

“It’s about helping people, but it’s not about letting the store go,” he said.

Some groups, including the NAACP, argue that Biden’s debt relief hasn’t gone far enough given America’s mountain of student debt.

“Winning off a debt of just $10,000 is like pouring a bucket of ice water into a wildfire,” wrote the NAACP leader in a CNN business opinion piece.

$300 billion price tag

Of course, canceling student loans comes at a cost. And when deficit reduction suddenly becomes a bipartisan trend in Washington, the cost will be borne by taxpayers.

According to Penn Wharton Budget Model estimates this week, one cancellation of $10,000 for each borrower earning less than $125,000 would cost the government about $300 billion. (The Penn Wharton model did not include the cost of canceling Pell Grant recipients’ up to $20,000 in student debt).

$300 billion isn’t a lot for a $25 trillion economy, but the cost of student debt forgiveness will offset the federal deficit cuts from the just-passed Inflation Reduction Act.

“All the deficit cuts will be wiped out,” Mark Goldwain, senior vice president and senior policy director for the Committee on a Responsible Federal Budget, told CNN’s Poppy Harlow.

Note that the White House has welcomed the deficit reduction aspect of the Inflation Control Act as a key inflation measure. And this marks a major shift after years of both parties adding to America’s mountain of debt to fight the Covid-19 pandemic.

Even Jason Fuhrman, chairman of former President Barack Obama’s Council of Economic Advisers, has doubts about Biden’s plan.

“It would be reckless to pour nearly $5 trillion in gasoline into an already burning inflationary fire,” Fuhrman tweeted. “Doing so while going well beyond one election promise ($10,000 student loan relief) and breaking another (all proposals paid out) is even worse.”

Still, Moody’s Zandi said it was “probably a big positive deal for nearly 40 million lower- and middle-income Americans, but a small negative deal for all American taxpayers.”

“sending the wrong message”

Beyond the economic impact, Biden’s plan has raised questions about fairness. Because it only helps those who were lucky enough to go to college.

Democratic Ohio Senate candidate Tim Ryan said Biden’s decision on student loans “sent the wrong message to the millions of Ohioans who worked just as hard to earn a living and didn’t get a degree.” will be sent,” he said.

“Instead of allowing six-figure earners to take out student loans, we should work to ensure that all Americans have an equal chance of success,” Ryan said.

Citing analysis from the Department of Education, the White House said nearly 90% of the relief money goes to those earning less than $75,000.

Student debt forgiveness comes too late for borrowers who worked for years to pay off their loans, only to now see others clearing their debts.

“I take it very seriously,” Baker said of fairness concerns. “We’re mitigating $10,000, not $50,000 or $100,000. That’s why $10,000 is a good number.”

the real problem continues

Cleaning out student loan debt, no matter the amount, won’t address the underlying problem. College tuition is too expensive.

According to Moody’s Analytics, between 2000 and 2021, college tuition has risen more than twice as fast as overall inflation. This is despite a slowdown in tuition price increases during Covid.

According to Moody’s, the basket of commodities, as measured by the consumer price index, will be 57% more expensive in 2021 than in 2000, and college tuition has risen 167%.

I don’t see how eliminating some of the student debt would solve that problem. And some, including former Treasury Secretary Larry Summers, have warned that debt relief could also help raise tuition fees.

“Costs are out of control. It’s ridiculous that people have to borrow so much and then struggle to pay it back,” said Baker. “The issue is unresolved.”


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