Student loan relief will increase inflation, wipe out Inflation Reduction Act benefits

Economists expect President Joe Biden’s sweeping student debt relief action will add fuel to the inflationary fire already facing the nation. On Wednesday, the president announced plans to cancel between $10,000 and $20,000 in student loan debt for borrowers earning less than $125,000 a year.

The White House estimates roughly 43 million Americans will qualify for some relief, while 20 million Americans could see their student loan debt completely wiped.

“When you’re saying to somebody you no longer have to pay down your debt and that creates more money for spending right now, that’s exactly the opposite of what the economy needs when you’re in an inflationary environment,” said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget.

In a statement, MacGuineas called Biden’s announcement “gallingly reckless,” noting it will make the national debt and inflation worse.

The Committee for a Responsible Federal Budget estimates Biden’s student loan package will cost half a trillion dollars.

The budget watchdog estimates loan cancellation will cost the government $360 billion over the next 10 years. Biden’s proposed changes to the income-driven repayment plan will add another $120 billion, while the extended payment pause tacks on an additional $20 billion. Together, the three policy proposals total half a trillion dollars.

The CRFB said the changes announced could cost “double the amount saved through the recently passed Inflation Reduction Act, completely eliminating any disinflationary benefit from the bill.”

The IRA is expected to reduce the federal budget by $275 billion over the next 10 years.

Inflation in July was at 8.5%, already near a 40-year high. A Wells Fargo economist said student debt relief could drive up inflation even higher by 0.1% to 0.3%. Bloomberg Economics also sees an upward push of around 0.2%.

“That is not going to be $10,000 in your pocket this year,” Penn Wharton Budget Model faculty director Kent Smetters said on Fox Business. “That’s going to be spread out and so we’re not going to get some big macro demand surge from this. But it certainly would be positive on inflation, but maybe 0.1%, maybe even up to 0.2% if they get more generous.”

In the big picture, it’s not a huge boost. But when inflation is already as high as it is, that pressure is moving it in the wrong direction. Multiple experts also speculate that canceling debt will only inflate the cost of college down the road.