Hot Take: Will Biden's Student Loan Forgiveness Drive Inflation Higher?

Student loan forgiveness has become a reality for the roughly 48 million Americans currently in debt.

President Joe Biden said in a speech on Wednesday the student loan payment moratorium would be continued for one final time through Dec. 31.

Americans who have loans owned by the Department of Education who earn $125,000 or less annually, or $250,000 as a household, are eligible for a $10,000 student loan forgiveness. In the event that they are Pell grant recipients, the amount rises to $20,000.

Read More: Biden Lays Out Student Loan Relief Plan: Do You Qualify For Forgiveness?

Though some are now wondering what the expected economic impacts of the loan forgiveness program are, and analysts don’t seem to agree.

Biden's relief contributions represent a retreat from earlier commitments as Democrats generally agree that Biden should introduce legislation to eliminate all student loan debt nationwide, something the president has previously proposed.

Some doubters claim that the loan forgiveness initiative could push inflation even higher than the historic 40-year peak it already achieved this year. The Inflation Reduction Act's (IRA) fiscal and inflationary advantages, according to Marc Goldwein, senior policy director at the Committee for Responsible Federal Budget (CRFB), will be completely undone by the debt relief.

According to Goldwein, simply extending the current payments moratorium until the end of the year would cost $20 billion, which is almost equal to the deficit reduction from the IRA's first six years.

For families with annual incomes under $300,000, canceling $10,000 per person in school debt would cost around $230 billion. These measures taken collectively would use about 10 years' worth of deficit reduction provided by the IRA.

Lawrence Summers, a previous secretary of the Treasury for President Bill Clinton and director of the National Economic Council for President Barack Obama said he hoped the Biden administration wouldn’t offer “unreasonably generous student loan relief” because each dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college.

“Student loan debt relief is spending that raises demand and increases inflation,” Summers said in an Aug. 22 tweet. “It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.”

Different economists have different opinions. According to Kent Smetters, a professor at the Wharton School of the University of Pennsylvania, the impact on inflation "would be tiny, probably one-tenth of 1 percent."

Moody's Corporation MCO says the combined effect will lower real GDP by 0.05% in 2023, lower unemployment by 0.02%, and lower inflation by 0.03%.

"We're not talking about raising or lowering inflation by a percentage point or even a half a percentage point. We're talking about a really small impact," Dean Baker, co-founder of the Center for Economic and Policy Research told CNN on Wednesday.

Photo: Jacob Lund via Shutterstock