Here’s how monster inflation could impact President Joe Biden’s decision on student loan forgiveness.
Here’s what you need to know — and what it means for your student loans.
Biden still is deciding whether to enact wide-scale student loan cancellation for millions of student loan borrowers. In late April, Biden said he would announce his decision within weeks. However, that date has passed — and student loan borrowers are wondering what’s next for student loans. There are substantive reasons to support or oppose wide-scale student loan cancellation, but there’s another issue that has received less attention: inflation. With inflation currently higher than 8%, how will the highest inflation in 40 years impact Biden’s decision on student loan forgiveness? Let’s explore.
Student loan forgiveness: impact on inflation
Will student loan forgiveness increase inflation? There are several considerations when it comes to wide-scale student loan forgiveness and inflation. For example:
Main causes of inflation
Inflation has been driven largely by post-pandemic demand, supply chain shortages and the conflict in Ukraine. In the short term, student loan cancellation would create a small impact on inflation, the White House said last month.
How student loan cancellation increases inflation
Critics of wide-scale student loan forgiveness say student loan forgiveness is a large financial distribution to millions of student loan borrowers. As these student loan borrowers gain new-found cash flow, they likely will spend it. Critics fear this increased spending could increase inflation.
Comparison to stimulus checks
While stimulus checks included upfront money, student loan forgiveness would be spread out over time. For example, $10,000 of student loan cancellation doesn’t mean student loan borrowers will get a $10,000 check to pay off student loans. Rather, student loan cancellation means student loan borrowers would not have to make their student loan payment each month, which could save a few hundred dollars, for example.
Student loan forgiveness: stimulate the economy
Sen. Elizabeth Warren (D-MA) has said that wide-scale student loan forgiveness will stimulate the economy. If that’s true, then critics say increased inflation is true also. More government spending, they argue, will increase consumer demand when it should be lowered to combat inflation.
Student loan cancellation: research says inflation would increase
According to research from the Committee for a Responsible Budget (CFRB), a nonpartisan and nonprofit organization, wide-scale student loan forgiveness would increase inflation. The CFRB says that student loan cancellation of $1.6 trillion of student debt would “increase the inflation rate by between 10 and 50 basis points (0.1 to 0.5 percentage points) in the 12 months after repayment is scheduled to begin.” Practically, this would lower student loan payments by $80 billion and increase consumption by $70 billion to $95 billion. That said, Biden is not considering canceling all student loan debt. If Biden cancels $10,000 of student loans or reconsiders $50,000 of student loan debt, the potential inflationary impact could be less. However, critics say the economy can’t adequately handle increased consumer demand from wide-scale student loan forgiveness.
Will Biden cancel student loans?
Will your student loans get canceled? Biden, who has canceled $25 billion of student loans, will weigh the substantives advantages and disadvantages of wide-scale student loan cancellation. Importantly, he doesn’t want student loan forgiveness to be the worst mistake of his presidency. However, beyond substantive considerations, Biden will assess how voters perceive student loan forgiveness and inflation. Biden doesn’t want to be blamed any further for inflation, which will be a top issue for voters in the midterm election. With high gas and food prices, Biden could decide that wide-scale student loan forgiveness isn’t worth the political capital if inflation continues to climb between now and the midterm election. If this happens, Biden could still focus on targeted student loan cancellation. Likewise, the student loan payment pause ends on August 31, 2022. Critics of broad student loan relief say that restarting student loan payments beginning September 1 will help temper inflation, as student loan borrowers will have less disposable income to spend in the economy. If you have student loans, the best next step is to prepare for the restart of student loan payments. Here are some popular ways to pay off student loans and save money: