With a deadline looming in less than two weeks for President Biden to decide what to do with the student debt, it should come as no surprise that conservatives are mobilizing with increasing intensity against relief for borrowers.
Among his main recent arguments is that debt relief would be inflationary.
Deficit advocates on the Committee for a Responsible Federal Budget, for example, worried last week that forgiving up to $10,000 in student debt per borrower would be so inflationary that it would destroy a decade of reduced inflation from the recently enacted Reduction Act. Biden inflation.
Canceling student debt will increase the wealth of the millions of Americans who need it most and promote racial equality — all without increasing inflation.
Mike Konczal and Ali Bustamante, Roosevelt Institute
A bill introduced by Republican members of Congress Elise Stefanik of New York, Patrick McHenry of North Carolina and Jason Smith of Missouri cites student debt cancellation as one of the Biden administration’s “harmful economic policies” that “exacerbated inflation and led to soaring prices.”
I’ve written about the silly arguments against student debt relief before. The inflation angle is relatively new, however, presumably because inflation is voters’ top concern as we approach midterm elections. It is natural, in some ways, for opponents of debt relief to attribute this kitchen table issue to their long history of opposition.
When that happens, however, they are wrong. Canceling student debt, even at higher levels, will not drive inflation. Critics are using faulty math to get their point across.
“Cancelling student debt will increase the wealth of the millions of Americans who need it most and promote racial equity — all without increasing inflation,” according to Mike Konczal and Ali Bustamante of the Roosevelt Institute, who deftly refuted the CRFB analysis the next day. . appeared.
Before getting into the economics of the issue, a few words of context.
In fact, Biden’s deadline only applies to one part of the student debt policy: the forbearance granted to borrowers since March 2020 in recognition of the burdens of the pandemic.
Since then, borrowers with federally guaranteed loans (which is more than 90% of the debt) have not had to make payments, and interest has not accrued on unpaid balances in that period.
Under current policy, the payment freeze will end on August 31. Biden could extend it by executive order; the Washington consensus is that he will, perhaps by the end of this year, so payments don’t have to resume before the election.
The other aspect concerns the cancellation of student loans. For many of the 45 million borrowers who currently owe a total of about $1.8 trillion today, this issue is far more important.
Biden pledged during his presidential campaign to forgive $10,000 per borrower. Progressives like Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) defended the cancellation of $50,000. Others support canceling full balances for some low- and middle-income borrowers. That decision does not need to be made immediately, although some Democratic supporters think the policy would be favored by Democratic voters in November.
Some traditional arguments against student debt relief can easily be dismissed. One is that forgiving debt today would be unfair to borrowers who had to sacrifice themselves to repay their loans. As I have written in the past, this is the argument from pure selfishness and a formula for permanent government paralysis.
It is a favorite among conservatives and those whose comfortable wealth makes them desensitized to the burdens of others. In 2020, responding to a survey of economists conducted that year by the University of Chicago, David Autor of MIT commented, “In addition to my kids’ student loans, I’d like the government to pay my mortgage. If the last idea shocks you, the first should too.”
The truth, of course, is that, in a healthy society, government policy advances by taking note of existing inequalities and striving to address them. Following the implications of the “I paid, why shouldn’t you” field to its natural conclusion means that we would not have Social Security, Medicare, or the Affordable Care Act today.
The injustice argument also ignores the generations of college students whose education was financed by taxpayers to a much greater extent than it is today. Tuition at the University of California, for example, was free for residents of the state from its founding in the 1860s until the 1970s.
UC’s tuition today is $13,104 a year for residents and $44,130 for non-residents, and constitutes what UC says is its “largest single source of core operating funds.”
Another common argument is that debt cancellation would be regressive – that is, it would disproportionately benefit the rich. The crux of this argument is that wealthier households carry more debt than lower-income households, so they would gain more by reducing their balances.
But this is a misconception based on mathematics. The truth is that the burden of student debt falls much more on low-income borrowers than on the affluent.
Comparing borrowers in the poorest 10% with those in the richest 10%, Laura Beamer and Eduard Nilaj of the Jain Family Institute showed that while “higher-income groups suffer higher average debt burdens ($23,160 for the decile richest and $16,094 for the lowest-income decile), this difference is small compared to the median income gap ($60,193 for the richest decile and $16,770 for the lowest-income decile).”
Even canceling $10,000 in debt would be of greater benefit to low-income borrowers than to the wealthy. Among borrowers with incomes of $20,000 to $40,000, 234,000 carry balances below $15,000, Beamer and Nilaj calculated. About 57% of borrowers in this income bracket have balances of less than $20,000, compared with 43% of those with incomes of $75,000 or more.
There is also no doubt that debt cancellation would have a strong impact on racial and ethnic economic inequality. About 75% of black borrowers have larger current loan balances than their original loans, mainly due to difficulty repaying, compared with 50% of white borrowers.
Once payments resume, the Federal Reserve Bank of New York reported in April, “Low-income, less educated, non-white, female and middle-aged borrowers will have a harder time making minimum payments and staying current.”
This brings us back to the newest wrinkle in the anti-relief argument: that debt relief will be inflationary and will increase the deficit.
The CRFB is perhaps the fiercest deficit censorship among conservative think tanks in Washington. He is a broad-spectrum fiscal critic. To his credit, he criticized the Republican Party’s massive tax cut for the wealthy in 2017, but he also sought benefit cuts to Social Security and Medicare, a reflection of the late billionaire hedge fund billionaire Pete Peterson’s long-standing sponsorship, who led a long campaign to reduce these programs.
The CRFB’s analysis of student debt relief states: “Simply extending the current payment break to the end of the year would cost $20 billion – equivalent to the full deficit reduction of the IRA’s first six years… Canceling $10,000 per person of student debt for families earning less than $300,000 a year would cost about $230 billion.”
Put these two options together, the group says, and “these policies would consume nearly 10 years of deficit reduction from the Inflation Reduction Act.” Their analysis further states that “debt cancellation would increase short-term inflation much more than the IRA would reduce it. A cancellation of $10,000, according to the CRFB, could add 0.15 percentage point to the inflation rate.” advance and create additional inflationary pressure overtime.”
Konczal and Bustamante found some suspicious math in this reasoning — specifically comparing apples to oranges, applying formal federal budget rules rather than real-world accounting.
Under the formal rules for credit programs, debt cancellation should be treated as if lost interest and principal payments occur immediately, in the first year, when in fact they are spread over the life of the loan. The Inflation Reduction Act, similarly, is treated as if its entire inflationary effect occurs in the first 10 years, when it also spans two decades or more.
The CRFB analysis therefore exaggerates the impact of debt cancellation on reducing IRA inflation. This flaw should be obvious. Spread over decades of student loans, unpaid debt payments amount to about $13 billion a year.
“It’s about allowing borrowers to keep $13 billion a year in income,” Bustamante told me. “This represents about 0.08% of total personal consumption.” For an economy with about $16.5 trillion in annual personal spending, $13 billion is “negligible when it comes to inflationary pressure.”
Nor is there any evidence that people would spend that money, creating inflationary demand. The evidence from more than two years of debt forbearance so far is that borrowers have used it to improve their household balance sheets, paying off high-rate credit card debt and saving the rest.
Not to mention what has been driving inflation last year. It’s not personal consumption on the demand side, but constraints like supply chain disruptions and restricted oil supply. Both factors have declined in recent months, which is why the monthly inflation rate in July dropped to 0.0%. (The Federal Reserve may be making the same mistake in its anti-inflation campaign.)
The power of inflation as a scary word must now explain the rhetoric employed by Stefanik, McHenry and Smith when they launched their attack on debt relief in July.
Stefanik represents the sixth poorest congressional district of New York’s 31, with an average income of $57,320. McHenry’s is the fifth poorest in North Carolina, with an average income of $53,189. Smith’s is the poorest in Missouri and the 22nd poorest of all 435 districts represented by voting members.
That suggests his own voters would be lining up for more student loan forbearance and cancellation help, including help dealing with pump and supermarket prices. In this case, as in many others, we must ask who these politicians are working for – certainly not the people who elected them.
Clearly, student debt relief will be a wealth-generating and economic growth initiative. It will not create injustice, but it will correct the economic injustice that has been accumulating for decades. Biden’s direction should be obvious.
This story originally appeared in the Los Angeles Times.