After months of uncertainty, the Biden administration officially announced Wednesday that it will cancel up to $20,000 in student loan debt for many borrowers. Supporters took the move as a win that would help lift the burden of student loans for millions of people, including many of the neediest borrowers.
But it’s also drawn criticism, including from economists who argue that loan forgiveness could worsen inflation during a time when prices are already climbing rapidly.
Conservatives have also attacked the policy and said it would fuel inflation. Mitch McConnell, the Senate minority leader, said the policy would “give away even more government money to elites with higher salaries” rather than help working families who are struggling to keep up with rising prices.
Many experts say it’s plausible for the policy to increase inflation. If people have less student loan debt to pay off, that frees up a portion of their budgets that they would otherwise spend on their loans.
That might make people more likely to purchase things like new couches or cars. And as demand increases and consumers spend more, that tends to drive prices up.
The plan, these experts say, will cost taxpayers and does nothing to solve the tough unaffordability issues that plague higher education in the U.S.
“There’s a transfer of wealth from the society at large to people who borrowed to go to college right now,” said Andrew Lautz, director of federal policy at the National Taxpayers Union.
“That has consequences for consumers,” Lautz said. “It has consequences for taxpayers.”
Lautz published an estimate on Tuesday that found Biden’s plan could cost the average taxpayer more than $2,000, based on the $10,000 forgiveness per student loan borrower that had been touted.
The effects of the relief will be felt widely. Of the 43 million federal student loan borrowers eligible to benefit, about 20 million will have their debt completely eliminated, according to White House estimates, with 90 per cent of help going to those who earn less than $75,000 a year.
The loan forgiveness will likely counter any deflationary impact from the recently passed Inflation Reduction Act, Beth Akers, a senior fellow at the American Enterprise Institute, said on Bloomberg Radio’s Balance of Power.
“It’s actually not hugely inflationary,” said Akers, a former staff economist in the Council of Economic Advisers under George W. Bush. “This will increase the inflationary pressure, but it’s still not a game changer in terms of the inflation debate.”
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.”
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