Will Student Loan Forgiveness Make Inflation Worse?

On August 24, President Joe Biden made the much-anticipated announcement of student loan forgiveness. Low- to middle-income borrowers will see as much as $20,000 erased from their federal loan balances in the coming months.

While the cancellation announcement comes as a victory for the Biden administration, there’s growing anxiety about how this could exacerbate an already bloated inflation rate. As high prices continue to stress wallets, nearly 3 out of 5 consumers say they worry that student loan forgiveness will worsen inflation.

But just how much the new loan forgiveness will affect inflation—and how its impact will make its way to consumers—is being debated by economists.

How Student Loan Forgiveness Could Affect Inflation

Americans collectively hold $1.75 trillion in student loan debt. In theory, less student debt to repay frees up cash that consumers could spend. This could increase demand and cause prices to jump. But economists remain divided over how much Biden’s plan will cause inflation to spike.

The few available estimates on Biden’s loan forgiveness program’s impact on inflation show a small impact, percentage-point wise, in the immediate future.

The Committee for a Responsible Federal Budget (CRFB), a nonprofit public policy organization, estimates that $10,000 of debt cancellation for borrowers making under $300,000 could add up to 15 basis points (0.15%) to the inflation rate “and create additional inflationary pressure over time.”

The CRFB’s estimate doesn’t factor in the income limits imposed by Biden’s newly released forgiveness plan. The relief targets individuals making less than $125,000 per year ($250,000 for those who file jointly).

“In the grand scheme of things, [the CRFB’s projection is] not that big of a deal. People aren’t going to notice,” says Patrick Gourley, associate professor of economics at the University of New Haven. “When you talk about even 10 basis points, that’s a tenth of a percent.”

Gourley adds that the forgiveness “isn’t going to generate large consumer spending,” which could be a factor to inflated prices.

This is because only 31% of borrowers would see their debt completely erased by Biden’s plan, according to a report from the New York Federal Reserve. That means the majority of borrowers will be again bound to monthly payments come January. Mark Zandi, chief economist for Moody’s Analytics, tweeted that the net factor of repayment and forgiveness combined “is largely a wash” on inflation.

Other economists have different takes. Jason Furman, professor of economics at Harvard and former economic advisor to President Barack Obama, described Biden’s student loan forgiveness program as reckless because people may expect debt forgiveness again in the future. He did add that the inflation impact will be “relatively small.”

According to an early estimate by the Wharton Budget Model, forgiving up to $10,000 per borrower within Biden’s income limits would add about $300 billion to the federal deficit over the next decade; the federal government ran a deficit of $2.8 trillion in 2021.

Future Tuition Costs Could Rise after Student Loan Forgiveness

Though the macroeconomic effects remain debated, economists agree on another potential consequence of student loan forgiveness: Increasing tuition costs in the future.

Gourley says that forgiveness could set a dangerous precedent for both future borrowers and universities. People could potentially borrow more in student loans hoping a portion of it will eventually be forgiven—and schools will jack up their prices to follow suit.

“If you think the price of college has gone up a lot in the past 10 years, just wait for the next 10,” Gourley warns.

The CRFB and Wharton Budget Model also warn that the benefits from loan cancellation could be erased after colleges subsequently raise their prices. But that largely depends on schools and consumers seeing forgiveness as an ongoing strategy.

One of the biggest criticisms of Biden’s forgiveness plan is that it doesn’t address the heart of the problem: Sky-high tuition. Student Defense, a nonprofit student loan advocacy organization, describes the student loan cancellation as trying to bail water out of a sinking ship without first plugging the leaking hole.

“​​Without swift and meaningful reforms, it’s likely we’ll end up back in this precarious situation in the near future,” reads a statement from the organization. “Now is the time for the White House, Congress, and the Department of Education to work with a new urgency to tackle the problems that got students into this mess.”

Read more: If Biden Forgives Your Student Loan, Will You Owe Taxes?

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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