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Student loan forgiveness a ‘meaningful gesture’ but move could drive up inflation, Northeastern economist predicts

President Biden announced this week that some student loan debt will be forgiven. While this is welcome news for borrowers, experts say it's the wrong move economically. Photo by Alyssa Stone/Northeastern University

President Joe Biden’s student loan forgiveness announcement was a welcome one for the millions of Americans who struggle with student debt. However, two Northeastern economists question whether it was the right move for the economy.

The Biden administration announced on Wednesday that it would forgive $10,000—$20,000 for Pell Grant recipients—in student debt for borrowers who took out loans before June 30, 2022, and make less than $125,000. He also extended the freeze on payments to the end of the year, and offered to cap payments to 5% of a borrower’s income. Some borrowers will get relief automatically, but most will need to apply; applications will be open by the end of the year.

“In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023,” the president said in a tweet.

The move is not as impactful as it may seem, says Robert Triest, professor of economics at Northeastern’s College of Social Sciences and Humanities. 

“Loan forgiveness is something that doesn’t have an overwhelmingly strong case supporting it,” he says. 

Not only will this drive up inflation slightly, he says, the funds could have been spent on something that would have a greater impact.

Of course, forgiveness will help the 45 million Americans who have a total of $1.6 trillion in student loan debt, as reported by The New York Times. 

“It’s certainly a meaningful gesture,” says Nancy Kimelman, assistant teaching professor of economics at Northeastern’s College of Social Sciences and Humanities. “Certainly this is something that’s welcome to those people who will be affected.” 

This includes college graduates who are having a hard time affording large purchases, something that Biden mentioned in his statement. “It’s about making sure folks have the breathing room they need to buy a house, open a business, start a family, and save for their future,” he wrote on Twitter.

However, it’s the wrong move on the macroeconomic level, especially considering the current state of the economy, says Triest. While Triest sympathizes with the burden of student loans, he says that loan forgiveness could increase inflation by allowing people to spend more, and therefore drive up demand for goods and services. 

“That will put some upward pressure on prices,” Triest says. 

The effect will be minor, but it’s counter to the administration’s current strategy of slowing down the economy by raising interest rates.

Kimelman, for her part, downplays the impact that loan forgiveness could have on inflation. 

“After the kind of spending we had at the federal level in the last two and a half years because of the pandemic, the cost of wiping $10,000 off right now for certain families, it’s not peanuts,” she says. “But I don’t think it’s going to be the make or break for the rate of inflation.”

Both agree that the plan does not address bigger issues the nation is currently facing. The forgiveness is expected to cost $300 billion, an amount that Triest says could be better spent helping people who have not attended college.

“It’s essentially using federal expenditures to make people who may be better off than the average taxpayer to begin with, better off still,” he says. 

Even though there’s a cap on the income to qualify, “many of those who are receiving forgiveness may still have very promising futures based on the education they received,” he says. Spending the money on something like preschool programs, he said, would have a “greater bang for the buck in terms of improving lives.”

The payoff could come in the form of political points for Biden. “I think it’s purely politics,” Triest says. “It was a campaign promise he made.” 

Kimelman says the timing could have political motivation with looming midterms. “That’s always possible,” she says. “But I think he’s been under pressure to do something about student loans for a while.” 

For media inquiries, please contact media@northeastern.edu. 

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