Could Student Loan Forgiveness Worsen Inflation?

While the Biden administration’s announcement of up to $20,000 in federal student loan forgiveness is welcome news to most everyone working on paying off their student loans, economists are more conflicted in their views.

Depending on which economist you ask, the new policy will either definitely make inflation worse or definitely won’t have much impact at all.

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In the former camp is the Committee for a Responsible Federal Budget (CRFB), which has claimed that the loan forgiveness will “wipe out the disinflationary benefits of the Inflation Reduction Act,” which was signed into law on August 16.

The CRFB estimates that the program will cost an “astronomical $400-$600 billion.” In the past, it has separately estimated that $10,000 in forgiveness would add roughly 0.15% to the personal consumption expenditure (PCE) price index, a common gauge for inflation.

Naturally, not all economists agree with the slightly right of center CRFB. Economists at the left-leaning Roosevelt Institute wholeheartedly disagree with their assessment, saying that an inflationary effect, if any, would likely be “small” and would quickly be offset by the January 1, 2023 resumption of student loan payments.

Agreeing with the Roosevelt Institute is The Center for American Progress (CAP), which also says the impact on inflation will be “minor.” Previously, CAP called on the administration to cancel at least $10,000 in student debt for all Americans.

Meanwhile, Moody’s Analytics’ chief economist, Mark Zandi, believes the effect on inflation will be “largely a wash,” estimating that the canceling of student debt in this amount will increase inflation by just 0.08% when measured by the consumer price index (CPI). And, because borrowers will have to resume paying off their loans soon, Zandi expects CPI inflation to be reduced by 0.11% after the payment freeze ends, thus more than making up for the increase caused by loan forgiveness.

Regardless of what effects student loan forgiveness has on inflation and the economy overall, it still only “addresses the symptom, rather than the cause of student debt,” says Sarah House, a senior economist at Wells Fargo. “This doesn’t do anything to encourage colleges to help restrain costs and limit the amount of debt that students are coming out with in college.”

In order to avoid student loans becoming such a major problem again, something will most certainly need to be done about the debts incurred by students while in school.