The student loan plan proposed by President Joe Biden could be a game-changer for the nation’s indebted citizens. However, the effect on the economy as a whole is probably going to be so minimal that it will be difficult to quantify.
According to an announcement made by Biden on Wednesday, borrowers who earn less than $125,000 annually will have $10,000 of their debt forgiven. Borrowers with low incomes who used Pell Grants to attend college will be forgiven up to $20,000 in student loan debt.
Tens of millions of debtors will benefit from this debt relief by getting some breathing room at a time when living expenses are skyrocketing.
Importantly, the cancellation of student loans is being done in tandem with a plan to start lifting the payment moratorium on federal student loans in January 2023. Many Americans who haven’t had to pay down student loans since March 2020 may have to start doing so as a result, which will reduce their income flow.
Despite worries that Biden’s reduction of student loan debt will exacerbate the already severe inflation, economists claim the total impact will be negligible on the overall economy.
According to Moody’s Analytics Chief Economist Mark Zandi, “the debt forgiveness will promote growth and inflation, while the termination of the moratorium will weigh on growth and inflation.” “These cross-currents generally produce a wash in the net.”
According to Moody, the overall effect will have a negative impact on inflation by 0.03 percentage points, unemployment by 0.02 percentage points, and real GDP in 2023 by 0.05 percentage points. In other words, a negligibly small impact.
“We’re not discussing changing the inflation rate by a percentage point, let alone a half percentage point. We’re discussing a very minor influence, “According to CNN’s phone interview with Dean Baker, co-founder of the Center for Economic and Policy Research. “But for specific people, this has a significant impact. For more than half of the borrowers, it eliminates more than half of their debt. That is significant.”
Affected are millions of borrowers: According to a Department of Education research cited by the White House, the typical undergraduate student with loans graduates with roughly $25,000 in debt.
According to the White House, Biden’s student loan plan will provide relief to up to 43 million borrowers, including wiping out the whole outstanding load for nearly 20 million students.
If Biden had not set an income requirement for the debt relief or had followed pleas from certain progressives to forgive $50,000 in student debt, the inflationary impact would have been greater.
The $300 billion price tag: Of course, eliminating student loans has a price. And at a time when deficit reduction in Washington had suddenly become a bipartisan trend, taxpayers will be on the hook for that amount.
A one-time cancellation of $10,000 for each borrower earning less than $125,000 will cost the government around $300 billion, according to an estimate this week from the Penn Wharton Budget Model. (The cost of wiping off up to $20,000 in student debt for Pell Grant recipients was not factored into the Penn Wharton model.)
Although $300 billion isn’t big for a $25 trillion economy, the cost of the student debt forgiveness would cancel out the estimated federal budget deficit reduction from the just-passed Inflation Reduction Act.
The Committee for a Responsible Federal Budget’s senior vice president and senior policy director, Marc Goldwein, told CNN’s Poppy Harlow that “all the deficit reduction will be wiped out.”
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