Policy analysts argue that student-loan forgiveness is going to make the economy worse.
Key details
Bipartisan policy analysts are suggesting that President Joe Biden’s announcement last week to offer $10,000 to $20,000 in student-loan forgiveness to 43 million Americans will add to the budget deficit.
Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, told Barron’s that the policy will increase deficits by hundreds of billions of dollars, increase inflation, and up the risk of a recession.
“When all is said and done, we’ll have spent $800 billion on changes to student-loan policy since the pandemic started… This is a stunning amount of money to be spent without congressional approval. It’s on top of a $24 trillion national debt that is set to surpass its record as a share of the economy within the next decade,” says MacGuineas.
Why it’s important
This is yet another bleak prediction that the hundreds of billions of dollars spent to relieve the outstanding $1.6 trillion in total student debt won’t necessarily provide the economic relief that is intended.
With millions of young people struggling to dig their way out of debt, Biden’s executive order does little to address the underlying causes of the student-debt crisis and will create short-term negative effects on an already volatile economy.
Backing up a bit
As we previously reported, economists do not expect student loan forgiveness to have a major benefit to the economy. Two Goldman-Sachs analysts ran the numbers and found the $400-billion of deficit spending allocated to relieving student debt will have a nominal effect on spending power for borrowers. They expected a slightly negative impact and a bump in inflation going into 2023.
Biden defended the executive order saying that middle-class borrowers are struggling with an average of $25,000 in debt, which makes it harder to accumulate wealth, start small businesses, buy homes, and start families.
“Critics of the debt cancellation argue it will contribute to already high inflation, does nothing to help low-income people who never attended college, is unfair to people who already paid off their student debt, [and] doesn’t address the underlying cost of college,” reports CBS News.
“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless… There are a number of other highly problematic impacts including encouraging higher tuition in the future, encouraging more borrowing, creating expectations of future debt forgiveness, and more,” says President Barack Obama’s economic advisor Jason Furman.
“An entire generation is now saddled with unsustainable debt in exchange for an attempt, at least, at a college degree. The burden is so heavy that even if you graduate, you may not have access to the middle-class life that the college degree once provided,” says Biden.
Notable quote
“To say last week’s student loan plan is disappointing is a severe understatement. These actions show that contrary to the administration’s proclaimed stellar record on fiscal responsibility, the Biden administration is no different than the previous administration—recklessly adding to the debt and skirting the tradeoffs involved in sensible budgeting,” says MacGuineas.
