Biden’s Plan for Student Loans Caught in Debate Over Inflation

Courtesy of John Doe (Flickr CC0)

President Joe Biden has been mulling over a decision to cancel a portion of all student loans. News of his intentions has garnered both warnings from economists about inflation and ambitious calls from activists.

The Biden administration has taken steps to try and address the student loan debt crisis. It changed the eligibility for existing relief plans like the Public Service Loan Forgiveness program which allowed more people to qualify. Data shows that 1.6 million people have saved an estimated $32 billion from this change. He has now decided on a plan to provide debt relief for millions of borrowers.

The White House Finally Makes A Decision

Biden announced on Wednesday that he would eliminate at least $10,000 in debt per borrower. Pell Grant recipients will also get up to $20,000 of their debt canceled. Making this move would help fulfill one of President Biden’s campaign promises to eliminate student debt. Biden used executive authority to conduct the move, calling the cost of a college education outrageous.

That ticket has become too expensive for too many Americans. The burden is so heavy that even if you graduate, you might not have the ticket that graduating college once offered.

Courtesy of Michael Stokes (Flickr CC0)

Biden had been thinking over this decision for months due to pressure from democrats and activists. Many were calling for more debt to be canceled, with some activists urging the president to get rid of all debt from student loans. Erasing any portion has raised concern amongst some experts who warn of the effects the move will have on inflation.

Mixed Response From Experts

Pushing back or canceling loans has drawn criticism from some economists. Many are worried about its effect on inflation, which is already a huge problem on the government’s plate. The inflationary impact was at the front of Biden’s mind when he started taking a “hard look” at a possible executive action on student loans earlier this year. Americans could save billions if the plan goes through, but experts worry about this excess money being in the system. Inflation could be worsened by the extra money staying in the economy.

Former treasury secretary Larry Summers is among those who are worried. He warns that this move will ultimately benefit higher earners. The lower class will have their potential gains wiped out by inflation.

Student loan debt relief is spending that raises demand and increases inflation. It 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

Jason Furman worked as the chair of the Council of Economic Advisers during the Obama administration. He believes the proposed debt cancellation would reduce the weight of the Inflation Reduction Act to nothing.

While some thought the inflationary impact of debt cancellation would be negative, others like Kent Smetters see things differently. Smetters is a professor at the University of Pennsylvania’s Wharton School and head of the Penn Wharton Budget Model. He downplayed the effect of Biden’s plan on Inflation, estimating it to be “one-tenth of 1 percent.” Dean Baker is a founder of the left-leaning Center for Economic and Policy Research think tank. She thinks the benefits of restarting paused loan payments would outweigh the rises in inflation caused by debt relief.

Biden’s plan by the Numbers

Liberty Street Economics calculated that Americans would save $321 billion by having $10,000 erased per borrower. A third of these people, about 12 million, would have their debt wiped out entirely. However, a Wharton School of the University of Pennsylvania study found that the move would cost the government from $300 to $980 billion over a decade. After looking at all the data, Furman is not convinced this will be a good tradeoff for the average American.

Personally, I think that is not worth it given that much of the money is going to high lifetime income borrowers.

Written by Chiagozie Onyewuchi


USA Today: Biden weighs canceling $10,000 in student loan debt, decision as soon as Wednesday; by Joey Garrison and Chris Quintana
The New York Times: Student loan relief stokes a debate about its effect on inflation; by The New York Times staff’
USA Today: Debt and no degree’: Biden cancels as much as $20K in student loan debt: Recap; by Chris Quintana, Joey Garrison, Maureen Groppe, Ella Lee, Rebecca Morin, and Kenneth Tran

Featured and Top Image Courtesy of Victoria Pickering’s Flickr Page – Creative Commons License
Inset Image Courtesy of Michael Stokes’s Flickr Page – Creative Commons License

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