As the May 2 end to the federal student loan payment moratorium approaches, an independent public policy group found the question of cancelling federal student loan debt yields tough answers.
03/10/2022 1:00 P.M.
2 minute read
A new report from the Committee for Responsible Federal Budget shows cancelling the $1.6 trillion in federal student loan debt would increase the inflation rate “by between 10 and 50 basis points (0.1 to 0.5 percentage points) in the 12 months after repayment is scheduled to begin.”
The student loan payment moratorium ends May 2.
“Full debt cancellation would cost the federal government roughly $1.6 trillion, while improving household balance sheets by a similar amount. Consistent with our prior analysis, we estimate this would translate to an $80 billion reduction in repayments in the first year, which would in turn increase household consumption by $70 to $95 billion once the effect of higher wealth is considered,” the committee reports.
Additional key points include:
- The current economy is unable to meet existing demand considering “elevated disposable income, strong balance sheets, lingering supply constraints, and other factors.”
- The committee estimates that “cancellation of all outstanding student debt would boost personal consumption expenditure (PCE) inflation by37 to 50 basis points (0.37 to 0.5 percentage points) in the year after debt repayments are scheduled to resume. Even if only one-third of new consumption feeds into prices and the Fed responds with further tightening, we estimate student debt cancellation would increase inflation by 10 to 14 basis points.”
- None of these estimates reflect the possible effect that broad student debt cancellation could have on tuition prices. “Prospective students may expect future rounds of debt cancellation, which could increase their willingness to take on more debt, thus decreasing their sensitivity to the prices that schools charge and ultimately making it easier for schools to increase prices even faster than they already do,” according to the committee.
As news reports on federal student loan forgiveness plans continue to circulate and President Joe Biden mulls over cancelling student debt through an executive action, questions remain about how much these actions would help borrowers and the economy, and what some of the other unintended consequences might be, ACA International previously reported. ACA members can read more on this here: Insights: Across the Board Student Loan Forgiveness is Regressive.
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