From economists, how will student loan forgiveness affect inflation
Depending on who you ask, getting the Biden administration to forgive federal student loans of up to $20,000 will make inflation worse or won’t have much of an impact.
Committee on Responsible Federal Budget (CRFB) affirms that the debt forgiveness will “wipe out the disinfecting benefits afterward Inflation Reduction Act“was passed into law earlier this month.
It estimates that the operating action will cost a “astronomical $400-$600 billion“and previously estimated that $10,000 in forgiveness will increase by 0.15% to the personal consumption expenditure price index, a commonly used measure of inflation.
Economists at the left-leaning Roosevelt Institute strongly disagree with the CFRB’s assessment, argued that any inflationary effects would be “small” and offset by the resumption of student loan payments on January 1, 2023.
Center for American Progress – formerly Call to the White House to cancel at least $10,000 in student debt – also said impact on inflation would be “minor”.
Similarly, Mark Zandi, chief economist at Moody’s Analytics, says the impact on inflation “is largely a wash-out.” He estimates that student loan 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 drop by 0.11% once the payment freeze ends, as borrowers will have to start paying off the remainder of their loans.
Whatever the outcome, it will be difficult to measure precisely because there are “a lot of moving pieces to the inflation picture right now,” Sarah House, senior economist at Wells Fargo, told CNBC Make It. .
What’s unknown, according to House, is how canceled student debt will change consumers’ spending habits.
Even if student loans are forgiven up to $20,000, many borrowers will still have to make monthly payments when the payment freeze ends. But for some people, carrying less debt can encourage more spending, in what’s known as rich influence.
Either way, canceling student debt only “addresses the symptom, not the cause of the student debt,” she said. “This doesn’t do anything to incentivize colleges to help limit costs and limit the amount of debt that incoming graduates have to bear.”
Register now: Get smarter about your money and career with our weekly newsletter
Do not miss: A ‘housing recession’ won’t drive down house prices, says economist: Here’s why