Although President Biden’s student loan relief program has plenty of upsides for borrowers, critics are raising concerns the landmark initiative could hurt the economy by fanning the hottest U.S. inflation in 40 years.
Wall Street’s message to Main Street: Don’t worry, because the impact of the student debt relief program on inflation will be small, and perhaps not even measurable.
Their forecasts come as some critics are sounding the alarm about the program’s impact on prices, which have surged in the past year amid strong consumer demand and supply-chain bottlenecks. In their view, wiping out billions in debt for the nation’s more than 40 million student-loan borrowers will fuel consumer spending, making it more difficult to bring inflation to heel.
But Wall Street economists think the impact will be tempered by student loan repayments restarting in January. And the average student debt load is about $36,000, which means that Biden’s plan only covers a portion of the typical borrower’s outstanding loans.
The program will reduce student debt balances by about $400 billion and shave payments from about 0.4% to 0.3% of personal income, Goldman Sachs analysts Joseph Briggs and Alec Phillips said Thursday in a research note. Total outstanding student debt in the U.S. is about $1.7 trillion, which means the loan forgiveness will erase fewer than one-quarter of outstanding balances.
“The aggregate effects from such an income boost would be small, however, with the level of GDP increasing by about 0.1% in 2023 with smaller effects in subsequent years. We would expect the effects on inflation to be similarly small,” they noted.
Bank of America economists agreed, noting that resuming student loan repayments will offset the relief from loan forgiveness.
“A dampened wealth effect and no alteration in the near-term path for disposable income lead us to leave our near-term outlook for personal spending unchanged,” they said in a report. “In turn, we leave our outlook for growth and inflation unchanged as well.”
To be sure, not every economist is so sanguine.
“[T]he commonsense view that the plan provides a direct benefit to borrowers is correct,” Harvard University economist Jason Furman, former chair of the Council of Economic Advisers under President Obama, wrote on Twitter. “But economists & analysts need to use that same perspective to understand what the indirect costs are for others. Inflation is one of them.”
Furman warned in another tweet that the debt-relief program will be “[p]ouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning,” calling it “reckless.”
In sum, the commonsense view that the plan provides a direct benefit to borrowers is correct. It is helping many & not hurting any.
But economists & analysts need to use that same perspective to understand what the indirect costs are for others. Inflation is one of them.
— Jason Furman (@jasonfurman) August 25, 2022
In their view, the impact of millions of households with additional income will likely drive up prices at a time when food, housing and other costs are already sharply higher.
Even so, some economists point out that the reason for student debt relief should focus on the good it will provide to millions of households, not merely on dry economic figures.
“Whatever you think about student debt cancellation, inflation worries shouldn’t drive the policy, as some people seem to be arguing,” wrote Nobel laureate economist Joseph Stiglitz on Twitter. “What next? Eliminate food stamps as a way to fight inflation?”