How Forgiving Student Loan Benefits Could Cause Inflation?

Key Takeaways:

  • US President Joe Biden is likely to wave off a portion of loans for millions of students
  • Political opponents and economists argue that the move could increase inflation
  • Meanwhile, others argue that there will be no impact on inflation from student debt relief
US President Joe Biden is expected to wave off Student debt this week. His opponent argue, that forgiving student loans will increase inflation.
Will forgiving student loans cause further inflation? Image by Cari Dobbins from Pixabay 

YEREVAN ( — US President Joe Biden is set to make a major decision this week regarding student debt. Millions of students in the country expect him to write off their loans. In addition, they hope he will once again extend the student loan payment pause.

However, these speculations have ignited a debate in the country. Many politicians and economists are worried, that forgiving student loans will cause further inflation. 

Meanwhile, the student debt crisis has brought America’s Economic Inequalities into the limelight. 

Why is there a debate about student debt in the US? 

Owing to the Covid pandemic, the US Government has suspended student loan repayment for over two years. According to the official decision, the payment pause includes a suspension of loan payments and a 0% interest rate. Moreover, the decision stopped collections on defaulted loans as well.

Although the suspension first came about two and a half years back under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it has been subjected to multiple extensions by former President Donald Trump and current president Joe Biden. 

The latest extension set the deadline for the student debt pause on 31 August 2022. With just seven days to go, students expect to receive another relief from the authorities. 

Is it moral for the US Government to cancel student debt?
Is it moral for the US Government to cancel student debt? Credit: Twitter

Meanwhile, the US administration has already dropped hints that the President will decide on the matter soon. Education Secretary Miguel Cardona revealed on NBC’s “Meet the Press”, that the announcement will come before the deadline. 

“We know Aug. 31 is a date that many people are waiting to hear something from. We’ve been talking daily about this and I can tell you that the American people will hear within the next week or so from the President and the Department of Education,” 

Cardona said. 

According to reports, around 45 million borrowers collectively owe about $1.8 trillion in student debt today. 

Recommended: Liz Truss’s tax cut could fuel inflation in U.K. — experts

Biden to announce a $10K relief to student debt holders

According to several reports in the local press, President Joe Biden will also announce a partial cancellation of student loans. 

Pundits and observers expect him to forgive up to $10,000 in loans per borrower if they earn less than $125,000 per year. 

The speculations on the amount stem from Biden’s election campaign. He had announced his plans when running for president. 

“I am going to make sure that everybody in this generation gets $10,000 knocked off of their student debt as we try to get out of this aweful pandemic,

he had announced. 

However, people have already accused him of going back on his promise. After all, he won’t be forgiving the loans for “everybody”, as he had said. 

Other politicians from his party, such as Senators Elizabeth Warren and Bernie Sanders, want the Government to forgive student loans to the tune of $50,000. Moreover, some have even called for the complete cancellation of the loan for middle- and low-income borrowers.

However, critics and political opponents find this idea outrageous. 

Will forgiving student loans cause inflation? 

Forgiving student loans at a time of economic instability can prove counter-productive, according to many in the US. Inflation in the country hit a 40-year high in June, reaching 9.1%. While it slowed in July to fall to 8.5%, it remains high.

59% of the respondents to a recent survey by CNBC claimed, that they are worried that forgiving student loan debt could make inflation worse.

An additional 34% were of the opinion, that the Government should forgive the student debt of only those in need.  

In contrast, 32% claimed President Biden should forgive all student debt while only 30% were against forgiving US student loans. 

Moreover, as the news network reported, 81% of Republicans and 41% of Democrats say forgiving student debt will make inflation worse. The idea has also found criticism from Economists Lawrence H. Summers. 

Summers served as Secretary of the Treasury for President Clinton and Director of the National Economic Council (NEC) for President Obama. According to him, “student loan debt relief is spending that raises demand and increases inflation.”

Professor Lawrence Henry Summers believes student loan debt relief will increase inflation.
Professor Lawrence Henry Summers believes student loan debt relief will increase inflation. Credit: Twitter

Political opponents are also going after Biden, who is already facing enough criticism for his handling of the economy. According to United States senator for Arkansas and Republican Party member Tom Cotton, the decision to forgive Student debt is a bad idea. 

“Joe Biden has had a lot of bad ideas. But transferring billions in student loan debt to taxpayers—especially at a time of high inflation—might be his worst idea yet,” 

he claimed
Republican Senator Mike Braun is against student debt relief.
Republican Senator Mike Braun is against student debt relief. Credit: Twitter

Moreover, the General Accounting Office (GAO) recently published a report calling the Federal Direct Student Loan program a cost to the Federal Government. 

Are inflation worries in forgiving student debt exaggerated? 

While Biden’s political opponents are raising the red flag, many believe the link between forgiving student debt and inflation is exaggerated. 

According to Mike Konczal and Alí Bustamante of the Roosevelt Institute, canceling student debt would increase wealth, not inflation. 

“Student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity — all without increasing inflation,” 

they argue in a detailed post. 

Moreover, as Michael Hiltzik, a Business Columnist at LA Times argues, those arguing that debt relief would be inflationary “are using faulty math to make their point.”

As former US Congress hopeful Joey Palimeno points out, student debt forgiveness will not impact inflation.

The impact of student debt on inflation, if at all, will be minimal.
The impact on inflation, if at all, will be minimal. Credit: Twitter

Meanwhile, a grassroots organization called Student Loan Justice is campaigning for a friendly student debt policy. According to it, since the current inflation is not due to an increase in demand, there is no risk that canceling student loans will increase inflation. Moreover, the purchasing power of students will not increase to the extent that it will impact the economy.

Student loan cancellation will not impact inflation.
Student loan cancellation will not impact inflation. Credit: Student Loan Justice

Even total student loan cancellation could not contribute to additional consumption (demand), and thus could not contribute to inflation,” 

the organization argues

With President Biden now likely to announce his plans any day this week, it remains to be seen what impact it will have on students. After all, with mid-term elections a little over two months away, timing is everything.

Student Debt, How Forgiving Student Loan Benefits Could Cause Inflation?

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