The increasingly real prospect of student loan forgiveness is sparking highly contentious debates in America. But beyond the arguments about who (if anyone) should benefit from relief and how much should they get, there's another question to consider: If student debt cancellation becomes a reality, how would it affect inflation?
In 2020, President Joe Biden campaigned on canceling $10,000 of student debt per borrower. In recent weeks, the Biden administration has signaled student debt forgiveness could soon be on the way. This is most likely to be accomplished via executive action, even though in the past Biden has expressed a preference for Congress to pass legislation forgiving some level of student debt.
In the meantime, advocates, students and lawmakers to his left flank have been urging the president to forgive even more — from $50,000 per borrower to total student debt forgiveness, and they seem to be gaining some ground.
Depending on what flavor of forgiveness the Biden administration lands on, the price tag could range anywhere from $321 billion (for the $10,000 proposal) all the way up to about $1.6 trillion (for total student debt cancellation).
Some critics of student loan forgiveness say that this kind of massive relief initiative would inevitably lead to even higher inflation than what we've experienced in recent months. Making student debt disappear, the thinking goes, would be the equivalent of putting more money into the hands of millions of Americans. And as these beneficiaries increase their spending on any number of goods and services, it would cause inflation to rise.
At 8.5%, inflation is at a 41-year high and has become a top economic concern of Americans. So it's no surprise people are worried that government spending on loan forgiveness could make inflation even worse.
However, according to higher-education experts, economists and recent research, canceling student debt is likely to bump up inflation only in a minor way. In the grand scheme of the student forgiveness debate, experts told Money that inflation is actually among the least of their worries.
Student loan forgiveness, stimulus checks and inflation
It might be tempting to think of student loan forgiveness in the same vein as another monumental government relief effort: stimulus payments.
Many economists agree that stimulus checks sparked consumer demand and contributed to our recent inflationary woes. Would canceling as much as $1.6 trillion of student debt cause inflation to spiral out of control? Some critics of the Biden administration are saying that it would.
“Joe Biden's $1,400 stimulus checks helped cause inflation," Rep. Lance Gooden, R-Tx., a member of the House Committee on Financial Services, recently tweeted. "Imagine what ‘canceling’ $10,000 in student loan debt will do.”
To Gooden’s point, the federal government did spend approximately $817 billion on direct stimulus payments — two authorized by President Donald Trump and one from Biden — to most Americans. Yet experts say student loan forgiveness would impact inflation very differently than direct stimulus payments.
The overall impact of student debt cancellation on inflation? “Small or moderate,” says Adam Looney, an economist and finance professor at the University of Utah who specializes in higher-education policy.
A key reason student debt forgiveness wouldn’t have the same effect as stimulus payments is that the student relief would be spread out over a long period of time, Looney notes, while stimulus checks typically came in large lump-sum payments.
Instead of flushing Americans with cash instantly in the form of stimulus payments, student loan forgiveness would have a slow-trickling effect, freeing up a few hundred dollars in borrowers' budgets, month after month. Some might spend all of these funds on goods or services; some might save it; and some might use the wiggle room in their budget to finance another debt.
In other words, getting a $10,000 student loan canceled is much different than getting a $10,000 check in the mail.
“You can’t take it to the bank and spend it,” Looney says of student loan forgiveness.
There's another simple reason that the impact of loan forgiveness on inflation would be small compared to stimulus payments: Stimulus checks went out to approximately 175 million people, whereas even the broadest federal student debt relief option would affect roughly 40 million borrowers.
Inflation and the student loan moratorium
Rather than comparing student loan forgiveness to stimulus payments, Looney says a better comparison might be to look at the inflationary effect of the current student loan moratorium — which has frozen payments for the vast majority of student borrowers for more than two years now.
Since the moratorium began in March 2020, the federal government has waived the collection of about $200 billion in loan payments, according to a recent report from the New York Federal Reserve. The NY Fed also found that the median amount owed by a federal student loan borrower is just under $19,000.
Few economists blame the loan payment pause as the reason inflation is high. Rather, ongoing pandemic-related supply chain issues, an extremely tight labor market and the war in Ukraine are considered the top contributors for rising consumer prices.
However, the moratorium isn’t a perfect comparison, either, according to Sandy Baum, an economist and senior fellow at the Urban Institute, a non-profit economic think-tank. That’s because people view a pause in their loan payments differently from the total forgiveness of their loans.
“If you think you're not going to have to make payments for a year or two, but then your payments are going to resume" after the moratorium ends, says Baum, "that's very different psychologically from not ever having to make those payments again."
For that reason, both Baum and Looney say that the cancellation would likely have a slightly bigger impact on inflation than the current moratorium.
How student loan forgiveness would affect inflation
The research largely bears this out. The Committee for a Responsible Federal Budget (CRFB), a non-profit organization that pushes for reducing federal debt, recently estimated what total student debt cancellation would do to inflation.
Its analysis found that wiping out $1.6 trillion worth of federal student debt would increase the inflation rate by 10 to 50 basis points (or by 0.1 to 0.5 percentage points) over 12 months when compared to resuming payments over the same period of time.
“The inflation effect of cancelling $1.6 trillion in student debt would be small relative to the enormous amount involved, since repayments are spread out over time,” the report states. “However, the increase is significant relative to the underlying inflation rate.”
Put simply, if the inflation rate was at a normal level — say around 2%, which is roughly the rate the Federal Reserve likes to see — the effect on the average consumer and the economy as a whole would probably be minimal if it ticked up to 2.1% to 2.5%. Given that inflation is already so high, this small uptick would make a bad situation slightly worse.
The estimate’s wide range is also something to keep in mind, Baum notes.
“Nobody's really going to notice if it’s 7.1% or 7.2%,” Baum says. “But 7% versus 7.5% is a much bigger difference in terms of the prices that people are paying.”
Perhaps the biggest caveat of the CRFB’s study is that it assumes all student debt is being canceled, which is sort of a worst-case inflationary scenario, notes Abby Shafroth, a staff attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, a non-profit consumer-advocacy organization that is in favor of student loan forgiveness.
“President Biden has indicated that that's not an option on the table and that he is looking at somewhere between $10,000 to $50,000,” Shafroth says.
Since the total cancellation option isn't likely to happen, the ultimate impact on inflation will be smaller than what the CRFB found, she notes. On top of that, Biden is also considering an income cap on student loan forgiveness. That would mean fewer people would see their debts disappear, the cost to the government would be lower, and, in all likelihood, the impact on inflation would be even less.
Other problems with student loan forgiveness
The experts who spoke to Money say inflation is not what they're most concerned about in the student-debt debate.
“There are so many problems with the idea of forgiving student debt,” Baum says. “Inflation is one of the least important problems.”
Both Baum and Looney contend that broad-based student loan cancellation is a regressive benefit, meaning they believe it tends to disproportionally benefit higher-earning individuals and white Americans. They would like to see a much more targeted approach to help the borrowers in need, such as expanding the Pell Grant or other already-existing loan forgiveness programs among other reforms.
Baum says that broadly canceling even $10,000 of debt for student borrowers is “totally inequitable.”
Even with an earnings cap — excluding folks from loan forgiveness who earn more than $125,000 or $150,000 — Baum says student debt cancellation could help very recent grads who borrowed a ton of money to prepare for very high-paying jobs.
“If you just got out of law school, you’re probably going to slip through [and benefit from loan forgiveness] because you don’t have a high income yet,” Baum says.
But not all higher-education experts feel this way. Shafroth, of the National Consumer Law Center, says canceling all federal student debt is the most equitable option and the best way to close the racial wealth gap.
“Total forgiveness is the only solution that ensures that all people who are struggling with student loan debt actually get that relief,” Shafroth says.
Adding arbitrary income cut-offs and qualifiers creates a benefit with winners and losers, she argues, and that could ultimately make student loan cancellation even more divisive. Similarly, these qualifiers make it harder — and more expensive — to implement on a logistical level for the Department of Education.
Simplicity is key, according to Shafroth, and she worries the more eligibility requirements the Biden administration adds, the likelier it will become that people will have to apply for debt relief.
“We have seen time and time again,” she says, “whenever people have to apply for benefits, it is the people who are most in need of benefits who aren’t able to navigate that administrative process.”