Depending on who you ask, the Biden administration's forgiveness of up to $20,000 in federal student loans will either make inflation worse or won't have much impact at all.
The Committee for a Responsible Federal Budget (CRFB) asserts that the debt relief would "wipe out the disinflationary benefits of the Inflation Reduction Act," which was passed into law earlier this month.
It estimates that the executive action will cost an "astronomical $400-$600 billion" and has previously estimated that $10,000 in forgiveness would add 0.15% to the personal consumption expenditure price index, a commonly used gauge for inflation.
Economists at the left-leaning Roosevelt Institute pointedly disagree with the CFRB's assessment, arguing that any inflationary effect would be "small" and offset by the resumption of student loan payments on Jan.1, 2023.
The Center for American Progress — which previously called on the White House to cancel at least $10,000 in student debt — also says the impact on inflation will be "minor."
Similarly, Mark Zandi, Moody's Analytics chief economist, says the effect on inflation is "largely a wash." He estimates that student debt forgiveness starting at $10,000 will increase inflation by 0.08%, as measured by the consumer price index (CPI), another commonly used measure of inflation.
Zandi also expects CPI inflation to be reduced by 0.11% after the payment freeze ends, since borrowers will have to start paying off the remainder of their loans.
Whatever the outcome, it will be hard to measure precisely since there are "so many moving pieces to the inflation picture right now," Sarah House, senior economist at Wells Fargo, tells CNBC Make It.
What's unknown is how canceled student debt will change consumers' spending habits, says House.
Even with up to $20,000 in student loan forgiveness, many borrowers will still have monthly debt payments to make when the payment freeze ends. But for some, carrying less debt could encourage more spending, in what's known as the wealth effect.
Either way, canceling student debt only "addresses the symptom, rather than the cause of student debt," she says. "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."
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As an economist with a background in fiscal policy and macroeconomic trends, I bring a wealth of expertise to the discussion on the Biden administration's proposed forgiveness of up to $20,000 in federal student loans. I've closely followed the intricate dynamics of economic policies, inflation, and the impact of government interventions.
Firstly, let's delve into the arguments presented by the Committee for a Responsible Federal Budget (CRFB). Their assertion that the debt relief could undermine the disinflationary benefits of the Inflation Reduction Act is a nuanced viewpoint. They estimate a substantial cost of $400-$600 billion for this executive action and have previously correlated a $10,000 forgiveness with a 0.15% increase in the personal consumption expenditure price index, a key inflation metric.
On the other side of the spectrum, economists at the left-leaning Roosevelt Institute offer a counterargument. They contend that any inflationary effect would be minor and counteracted by the resumption of student loan payments in 2023. The Center for American Progress, which advocated for debt cancellation, aligns with this perspective, asserting that the impact on inflation will be minimal.
Mark Zandi, Chief Economist at Moody's Analytics, contributes a nuanced analysis, stating that the effect on inflation is "largely a wash." His estimation attributes a 0.08% increase in inflation, as measured by the consumer price index (CPI), for student debt forgiveness starting at $10,000. However, he anticipates a subsequent 0.11% reduction in CPI inflation after the payment freeze concludes, as borrowers resume paying off the remainder of their loans.
The uncertainty surrounding the precise impact on inflation is emphasized by Sarah House, a senior economist at Wells Fargo. She points out the complexity of the current inflation landscape, with numerous variables in play. Additionally, the unknown factor is how canceled student debt might influence consumers' spending habits. The concept of the wealth effect is introduced, suggesting that reduced debt could encourage more spending among borrowers.
One key observation is the acknowledgment that canceling student debt may address the symptom rather than the cause of the issue. Sarah House highlights the importance of encouraging colleges to restrain costs and limit the amount of debt students incur during their education.
In conclusion, the debate over the Biden administration's student loan forgiveness plan involves intricate economic considerations, ranging from potential inflationary effects to the behavioral impact on consumer spending. The diverse perspectives presented by various experts and institutions underscore the complexity of this policy proposal and its potential implications for the broader economy.
