Economists who have worked inside the government and out disagree on the effect President Joe Biden’s student loan debt forgiveness plan will have on the economy, and whether or not it will exert an inflationary pull on already overheated consumer prices.
The plan will forgive $10,000 to $20,000 of federal student loan debt for borrowers making less than $125,000 per year, reducing a financial burden for millions of people. Federal Pell Grant recipients who meet income requirements will be eligible for $20,000 in student debt forgiveness. Current student loan payments continue to be paused through end of 2022. Once they resume, monthly repayments will be capped at 5 percent of a borrower’s discretionary income, down from 10 percent under an existing program.
Jason Furman, a Harvard economist and former Obama economic adviser, tweeted Wednesday that the plan could incentivize universities to raise tuition, encourage students to borrow more, and backfire by creating expectations of more loan forgiveness. The plan is also structured to include higher-income students because it provides $10,000 in relief to households earning a combined income of less than $250,000.
“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Furman tweeted. “…everyone else will pay for this either in the form of higher inflation or in higher taxes or lower benefits in the future.”
Former U.S. Treasury Secretary Larry Summers had a similar view, tweeting earlier this week that “student loan debt relief is spending that raises demand and increases inflation.” If universities raise tuition as a result of the plan, it could also have an inflationary effect, he said.
Not everyone agrees. Goldman Sachs economists Joseph Briggs and Alec Phillips said the student loan forgiveness won’t matter economically as much as people claim.
“The end of the payment pause and the resumption of monthly payments looks likely to more than fully offset the small boost to consumption from the debt relief program,” they wrote in a report.
Dean Baker, a founder of the left-leaning Center for Economic and Policy Research think tank, agreed that restarting paused loan payments would more than offset any rise in inflation from debt relief, New York Times reported.
The effect on inflation “would be small, probably one-tenth of 1 percent,” said Kent Smetters, a professor at the University of Pennsylvania Wharton School and head of the Penn Wharton Budget Model, in a DealBook newsletter interview.
Former Treasury Secretary Summers argued against “unreasonably generous student loan relief.” Instead, he offered an alternative to student loan forgiveness, tweeting, “I think the best way to relieve student debt would be to allow it to be discharged in bankruptcy. I’d support this reform.”
Photos: Lawrence Summers, former director of the National Economic Council, at the White House, Dec. 17, 2010 (AP Photo/J. Scott Applewhite) / Jason Furman, former chairman of the Council of Economic Advisers Chairman speaks at a daily briefing at the White House, Feb. 9, 2016 (AP Photo/Susan Walsh) / Background: Howard University campus, July 6, 2021 (AP Photo/Jacquelyn Martin)