Will student loan forgiveness make inflation worse? Here’s what economists say
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.
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.”