Biden announced Wednesday that his administration will forgive $10,000 in loans to borrowers making less than $125,000 a year. Low-income borrowers who went to college with Pell grants will receive up to $20,000 in student loans. This debt relief will breathe life into tens of millions of borrowers at a time when the cost of living has skyrocketed. Essentially, student debt forgiveness is combined with a plan to lift the freeze on federal student debt payments starting in January 2023. That means many Americans who have not had to pay student loans since March 2020 will have to start doing thus, eating into their cash flow. Despite fears that Biden’s student debt relief will fuel already stifling inflation, economists say the combined impact on the economy as a whole will be minimal. “Ending the moratorium will weigh on growth and inflation, while debt relief will support growth and inflation,” Moody’s Analytics chief economist Mark Zandi told CNN. “The net of these crosscurrents is largely a wash.” Moody’s estimates that the combined impact will reduce real GDP in 2023 by 0.05 percentage points, reduce unemployment by 0.02 percentage points and reduce inflation by 0.03 percentage points. In other words, a very tiny effect. “We’re not talking about inflation increasing or decreasing by a percentage point or even half a percentage point. We’re talking about a really small impact,” said Dean Baker, co-founder of the Center for Economic and Policy Research. CNN in a telephone interview. “But for individuals it makes a big difference. It eliminates more than half the debt for more than half the borrowers. That’s a big deal.” Millions of borrowers affected: The typical undergraduate student with loans graduated with nearly $25,000 in debt, according to an Education Department analysis cited by the White House. Up to 43 million borrowers would get relief from Biden’s student debt plan, including full balance elimination for about 20 million borrowers, according to the White House. The inflationary impact would be greater if Biden did not impose an income limit on debt relief or if he heeded the calls of some progressives to eliminate $50,000 in student debt. $300 billion price tag: Of course, there is a cost to canceling student debt. And that cost would be borne by taxpayers just when deficit reduction had suddenly become a bipartisan trend in Washington. A one-time cancellation of $10,000 for every borrower earning less than $125,000 would cost the government about $300 billion, according to an estimate this week from budget model Penn Wharton. (The Penn Wharton model did not include the cost of eliminating up to $20,000 in student debt for Pell Grant recipients). While $300 billion isn’t huge for a $25 trillion economy, the cost of canceling student debt would cancel out the projected savings in the federal budget deficit from the just-passed Inflation Reduction Act. “All of the deficit reduction will be wiped out,” Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget, told CNN’s Poppy Harlow. Note that the White House hailed the deficit-reduction aspect of the Inflation Reduction Act as an important inflation-fighting measure. And that marked a major shift after years of both parties adding to America’s mountain of debt to fight the Covid-19 pandemic.
