How Student Loan Forgiveness Could Impact U.S. Economy

BY GIULIA CARBONARO 

On Wednesday, President Joe Biden announced a plan to cancel a significant amount of student loan debts for tens of millions of Americans who borrowed money to go to college in recent years.

Specifically, Biden said he would wipe out $10,000 in debt for those earning less than $125,000 per year and $20,000 for those who had received Pell grants for low-income families—a subsidy the federal government provides for students in exceptional financial need. About a third of U.S. undergraduate students receive Pell Grants, according to the National Center For Education Statistics.

More than 45 million Americans owe a combined $1.7 trillion in federal student debt, with almost a third owing less than $10,000, according to federal data. The pandemic-era pause on federal student loan payments was also extended until the end of the year, though Biden specified this is the last time payments are paused.

Biden’s executive decision to forgive student loan debts, which bypassed legislation and now faces probable legal challenges, comes after months of debating the fairness and the impact such a move will have on the U.S. economy. Many fear this could worsen the already ramping inflation.

The move has been called “unfair” by top Republicans, with Senate Minority Leader Mitch McConnell notably saying that forgiving student loan debt now was “a slap in the face to working Americans who sacrificed to pay their debt or made different career choices to avoid debt.”

On the other hand, Biden’s decision fell short of the $50,000 debt cancellation many activist groups wanted and some progressive Democrats supported. On Wednesday, Vermont Senator Bernie Sanders called the move “a great step forward” but added that more has to be done.

What Impact Will Forgiving Student Loan Debt Have on the U.S. Economy?

Some experts and civilians have expressed their concern that forgiving student loan debt might worsen already record-high inflation, with Democrats worrying about the impact this could have 11 weeks ahead of the midterm November election.

On Wednesday, former chairman of Obama’s Council of Economic Advisors, Jason Furman, called Biden’s decision “gasoline on the inflationary fire.”

“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” he wrote on Twitter. “Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.”

Speaking with Newsweek earlier this week, Arthur Laffer, who served on the Economic Policy Advisory Board under the Reagan administration, said that Biden’s decision was a lose-lose for inflation.

“Of course, it will clearly worsen [inflation],” he said. “Inflation is really too much money chasing too few goods. There’s more to it, but that’s a good first step. [Forgiving student loans] will reduce the number of goods, which is inflationary. It will increase the size of the monetary base, which is also inflationary. The two together, I don’t know how much it will contribute [to inflation], but it’s not a trivial amount.”

But Alí R. Bustamante, the Deputy Director of the Worker Power and Economic Security program at the Roosevelt Institute think tank and former chief economist at the Louisiana Workforce Commission, told Newsweek that forgiving student loan debt won’t actually increase inflation.

“It really has no impact on inflation,” Bustamante said. “There’s two particular reasons why: the first one is that when you look at what’s actually on the table—for example, $10,000 of student debt cancelation—you’re looking at something like $13 billion per year, that would be foregone in terms of government collections, of government revenue.

“And so if you were to just imagine enabling, allowing these millions of American student borrowers to keep that $13 billion, that $393 a month, that’s just a very small drop in the bucket when we consider that overall the U.S. economy when it comes to personal consumption, is about $16.5 trillion. It’s .08 of a percent of that $16.5 trillion consumer spending,” he added.

The Biden administration has not yet determined how much the student debt relief will cost, as this will depend on the number of people who apply for it. Laffer estimates that if everyone who qualifies for the $10,000 relief applies, the relief would cost $440 billion in a $22 trillion economy, or roughly 2 percent.

But Bustamante said we should also consider who will be receiving this money, and what these are likely to do with it.

“When you actually look at the demographics of student debt, it’s disproportionately folks who have low income and low wealth,” he said. “And so what the research actually shows is that for this population, debt forgiveness actually doesn’t lead to additional spending. It actually leads to savings as well as debt servicing for other debt.

“When you look at the data from the Federal Reserve, folks who have low income and low wealth, oftentimes have actually even negative wealth. They don’t have any kind of buffer, economic buffer to withstand any kind of financial interruption, whether it’s unemployment, whether it’s your car breaking down,” he said.

According to Bustamante, forgiving student loan debt would go to “broadening economic security throughout the country.”

Biden’s remarks from the White House following his announced decision on Wednesday painted a similar picture.

“All of this means people can start finally to climb out from under that mountain of debt,” Biden said. “To finally think about buying a home or starting a family or starting a business. And by the way, when this happens, the whole economy is better off.”

According to Bustamante, the issue of high student debt loans in the U.S. has been an ongoing crisis that hasn’t been addressed by legal action.

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Bustamante believes that the decision by the Biden administration now would help struggling Americans to be more economically secure in a time when the cost of living is soaring beyond many’s purchasing power.

“Americans overall are going to have more money,” he said, “but those who’ll receive the student debt relief will keep the money in their pocket, rather than spend it.”

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Comments (1)

  • The president doesn’t have the power to appropriate money does he? This will have to be voted on by congress right? Upwards of 300 billion is not chump change and the American taxpayer is on the hook for it at some point.

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