What Biden’s Student Debt Forgiveness Means for the US Economy

President Joe Biden’s student loan plan is a potential game-changer for Americans drowning in debt. And yet the impact on the wider economy is likely to be so small that it will be difficult to measure.

Biden announced Wednesday that his administration will forgive $10,000 for borrowers who earn less than $125,000 a year. Low-income borrowers who went to college on the Pell Grants benefit will receive up to $20,000 in student loan forgiveness.

This debt relief will give tens of millions of borrowers some breathing room at a time when the cost of living has soared.

Critically, student debt cancellation is being combined with a plan to lift the federal student debt payment freeze, starting in January 2023. This means that many Americans who have not had to pay off student loans since March 2020 will have to start. to do so, eating into their cash flows.

Despite fears that Biden’s student debt relief will fuel already crippling inflation, economists say the combined impact will be minimal on the wider economy.

“The end of the moratorium will weigh on growth and inflation, while debt relief will support growth and inflation,” Moody’s Analytics chief economist Mark Zandi told CNN . “The network of these cross-currents is largely a wash.”

Moody’s estimates that the combined impact will reduce real GDP in 2023 by 0.05 percentage point, reduce unemployment by 0.02 percentage point and reduce inflation by 0.03 percentage point. In other words, a very small effect.

“We’re not talking about raising or lowering inflation by a percentage point or even half a percentage point. We’re talking very little impact,” said Dean Baker, co-founder of the Center for Economic and Policy Research. CNN in a telephone interview. “But for individuals it makes a big difference. Eliminates more than half of the debt of more than half of borrowers. This is a big deal.”

Tens of millions of borrowers impacted

The typical graduate student with loans graduates with nearly $25,000 in debt, according to a Department of Education analysis cited by the White House.

Up to 43 million borrowers will receive relief from Biden’s student debt plan, including the total elimination of the remaining balance of about 20 million borrowers, according to the White House.

The inflationary impact would have been greater if Biden had not imposed an income cap on debt relief or if he had heeded calls by some progressives to eliminate $50,000 in student debt.

Baker praised Biden’s plan as a “good compromise” that avoided going to extremes. “It’s helping people, but not giving away the store,” he said.

Some groups, including the NAACP, argue that Biden’s debt relief doesn’t go far enough, given the mountain of student debt in the United States.
“Cancelling just $10,000 of debt is like pouring a bucket of ice water on a wildfire,” NAACP leaders wrote in an opinion piece by the CNN Business .

A price of $300 billion

Of course, there is a cost to canceling student debt. And that cost will be borne by taxpayers just as deficit reduction suddenly becomes a bipartisan trend in Washington.
A one-time cancellation of $10,000 for each borrower earning less than $125,000 will cost the government approximately $300 billion, according to an estimate this week by the Penn Wharton Budget Model. (The Penn Wharton model did not include the cost of eliminating up to $20,000 in student debt for Pell Grant recipients.)

While $300 billion is not huge for a $25 trillion economy, the cost of student debt forgiveness would cancel out the projected savings from the federal budget deficit of the recently passed Inflation Reduction Act.

“All deficit reduction will be wiped out,” Marc Goldwein, senior vice president and senior policy director at the Committee for a Responsible Federal Budget, told Poppy Harlow of CNN .

Note that the White House hailed the deficit reduction aspect of the Inflation Reduction Act as an important measure to combat inflation. And that marked a significant shift after years of both parties adding to the United States’ mountain of debt to fight the Covid-19 pandemic.
Even Jason Furman, head of former President Barack Obama’s Council of Economic Advisers, has doubts about Biden’s plan.

“Pumping around half a trillion dollars worth of gasoline on the inflationary fire that is already burning is reckless,” Furman tweeted. “Doing this by going far beyond one campaign promise ($10,000 in student loans) and breaking another (all proposals paid for) is even worse.”

Still, said Moody’s Zandi, this is a “big positive deal for probably about 40 million, mostly low- and middle-income Americans, but [um] small negative deal for all American taxpayers.”

“Sends the wrong message”

In addition to the economic impact, Biden’s plan has raised questions about fairness because it only helps people who were lucky enough to go to college.
Representative Tim Ryan, the Democratic candidate for Ohio’s Senate, said Biden’s decision on student debt “sends the wrong message to the millions of Ohioans without a degree who work so hard to make ends meet.”

“Instead of forgiving student loans for those making six figures, we should work to level the playing field for all Americans,” Ryan said.
Citing an analysis by the Department of Education, the White House said nearly 90% of aid dollars go to those earning less than $75,000.
Student debt forgiveness comes too late for borrowers who have worked for years to pay off their loans, only to now see others have their debt eliminated.

“I take this very seriously,” Baker said of the fairness concerns. “We are relieving $10,000, not $50,000 or $100,000. That’s why $10,000 is a good number.”

real problem remains

No matter the amount, paying off student loan debt doesn’t solve the underlying problem: college tuition is too expensive.
Between 2000 and 2021, the cost of college tuition rose at more than double the pace of general inflation, according to Moody’s Analytics. This is despite a slowdown in tuition increases during Covid.

The basket of goods measured in the Consumer Price Index cost 57% more in 2021 than it did in 2000, while the cost of college tuition rose 167%, Moody’s said.

It’s hard to see how eliminating a chunk of student debt solves this problem. And some, including former Treasury Secretary Larry Summers, have warned that debt relief could also help boost tuition.

“Costs are out of control. It’s absurd that people have to borrow large amounts of money and then struggle to pay them back,” Baker said. “This problem is not solved.”