Don’t Forgive Student Loan Debt
If President Joe Biden Cancels Debt, He’ll Make Inflation Worse
By Jack McPherrin
The author is with the Heartland Institute
On May 10, President Joe Biden mentioned that the fight against ever-worsening inflation – which stands at 8.3% according to the April consumer price index report which has just been published – is its “first national priority”. He promised, “My whole plan is focused on cutting costs for the average family in America, to give them just a bit of a break.”
If true, he would immediately drop all discussion of student loan forgiveness. Yet the Biden administration has not wavered in its commitment to significantly reduce student loan debt for a large swath of the American public.
Currently, President Biden is considering several options, and political pressure continues to mount from Democrats for more extreme measures. Senate Majority Leader Chuck Schumer, D-New York, recently asked Mr. Biden to forgive $50,000 in student debt for each borrower, urging: “Borrowers not only need their debts suspended, they need them erased.”
In fact, what the average American citizen needs is to be able to pay for food and gas again without taking a heavy toll on their wallet. Over the past month, food prices have climbed a full percentage point. Gas prices hit again record $4.41 per gallon, down from less than $3 a year ago.
So what would Senator Schumer’s plan do to write off $50,000 per borrower? Let’s look at data from the Ministry of Education’s “Direct Lending Portfolio by Size of Borrower Debt”.
Cumulatively, the 39.3 million individuals included in the report hold $1.37 trillion in student loan debt as of the first quarter of 2022. If the Biden administration were to reduce debt by $50,000 per individual, taking simple averages for ranges above $50,000, it would total an overall reduction of $915 billion. Parallel scans came to very similar conclusions.
A recent publication of the Brookings Institution concludes that it would be “one of the greatest transfer programs in American history”. Comparing these exorbitant one-time expenditures to the cumulative expenditures of transfer programs over the past 20 years, only three – unemployment insurance, working income tax credits and food stamps – have higher totals. And the difference is quite negligible.
If there’s one thing we know about government transfer programs, it’s that they massively stimulate personal consumption spending. Each of the two periods since 1945 in which the United States has experienced significant destabilizing inflation is marked by a precursor to heavy fiscal spending through social initiatives.
In 1946-47, inflation reached nearly 20%, largely due to FDR’s New Deal and massive government spending for World War II.
Soaring inflation in the late 1960s and 1970s – though later exacerbated by downward oil supply shocks and turning into “stagflation” due to bad policy monetary – was primarily caused by President Lyndon Johnson’s unprecedented “Big Society” welfare policies.
For our current installment, we only have to look at the tax packages enacted during COVID-19.
As The New York Times recently illustrated, approximately $1.8 trillion in pandemic stimulus funds have gone directly to individuals and families.
When this money reached individual bank accounts in the second half of 2020 and early 2021, much of it was immediately inserted into the economy. A recent study by the National Bureau of Economic Research found that 42% of stimulus benefits went to consumer spending. Forty-two percent of $1.8 trillion is about $750 billion.
The PCE and the headline inflation rate then spiked side by side. As measured by the Federal Reserve, the PCE rose 9% from $15.46 trillion in March 2021 to $16.8 trillion in March 2022. It is no coincidence that inflation has rose a nearly identical 8.5% – for the highest annual jump since 1981 – over the same period.
There is no doubt that a causal link exists between President Biden’s outsized spending and the rapid onset of inflation. Despite Mr. Biden’s claims to the contrary, even Treasury Secretary Yellen recently admitted that fiscal and monetary stimuli have contributed significantly to inflationary pressures.
Now President Biden wants to double down on giving nearly 40 million Americans more “free” money.
The difference between COVID-19 payments and debt cancellation, however, is the heterogeneity of recipients. The aforementioned NBER study found that 31% of transfer payments were for debt payment, as many cash-strapped households were overwhelmed with bills.
One of the striking aspects of student loan forgiveness is that it benefits high and middle income people. People with a college education are much more likely to have higher incomes and are able to pay their bills without needing to be subsidized.
The Committee for a Responsible Federal Budget estimates that 30% of widespread debt cancellation would go to the highest income quintile, and only 5% to those at the bottom. Likewise, the wealthy have benefited the most from the ongoing payment pause during the pandemic. Because of the pause alone, a typical new doctor will have an average of $60,000 in debt forgiveness by August 31 – the current end of the moratorium – while a new lawyer will have received $37,000.
So, when households see their student debts erased and no longer have other debts to pay, where will this money go? Some will be saved, yes. But just as much if not more will flood the economy, further devaluing the dollar. A spending shock of hundreds of billions of dollars is not what the economy needs.
Moreover, such a measure would permanently adjust household consumption habits, maintaining their spending over a longer period and potentially exacerbating the past inflationary period.
Frankly, President Biden should go in the opposite direction and lift the payment moratorium. If all 40 million borrowers were to pay their average $300 a month again, it would reduce economic activity by $12 billion a month, curb spending habits and could even lead to a slight drop in inflation in the over time. In addition, it would prevent further discouragement of the workforce. Not to mention that it would confirm the sanctity of contracts, which is fundamental to maintaining social and economic trust.
Yet President Biden won’t because he desperately needs political support. Mr Biden suspended payments until just before the midterm elections on purpose, at the behest of many Democratic incumbents whose seats are vulnerable.
President Biden is also worried about his own popularity, with approval ratings at rock bottom. He is particularly unpopular with young, college-educated voters: the very people who would benefit most from his student loan forgiveness program.
Inflation affects every American citizen. Only 13% of the population holds student loans.
By pledging to cancel all debt, President Biden will subordinate the needs of every American citizen — not to mention the entire macroeconomy — to cater to a small subsection of the American public whose vote he is courting.
It is not the mark of a leader. It is the mark of a weak political animal, which drives our economy and our country into the ground every day.
Jack McPherrin ([email protected]) is research editor at the Heartland Institute. This review was provided by The Center Square.