Could canceling student loans have an impact on inflation?

(NEXSTAR) – Inflation is now at its highest level in four decades, and the Federal Reserve’s efforts to rein it in have so far failed to bring it under control. Some worry that an impending decision by the Biden administration to cancel student loans could only make matters worse. But will he?

President Biden is expected to make a decision on canceling federal student loans within the next two months, according to reports. In April, multiple sources confirmed to The Hill that Biden was considering cutting at least $10,000 per borrower.

An analysis by the Federal Reserve found that this type of discount would eliminate their entire balance for about 11.8 million borrowers, or just over 31%. This would result in an estimated $321 billion in federal student loan forgiveness.

Some have argued that canceling student debt could give a boost to the economy, giving borrowers currently in debt the chance to spend money on items they could have kept, like a car or a house. This increase in spending may not be ideal in the eyes of the Fed, which is trying to stabilize costs by making borrowing more expensive.

Still, some experts believe canceling student loans won’t have a big impact on inflation, including senior White House adviser Brian Deese. Speaking to reporters in May, Deese said the economic impact of any proposed student loan forgiveness “would be over several years or a few decades.”

He added that the impact on inflation “in the short term is likely to be…quite small”.

Canceling student loans would not put money directly into the pockets of borrowers like stimulus checks, which were intended to be used to spend and stimulate the economy. Instead, the forgiveness would end or reduce the payments borrowers must make on their federal student loans.

David Lazarus, business and consumer news contributor for Nexstar’s KTLA, agreed that the pardon would have a limited impact on inflation, but noted that “it could affect the Fed’s efforts to cool the economy, which would create more urgency for further rate hikes.”

“Loan forgiveness could provide people with more disposable cash,” he explained. “Although it’s not certain that people would splurge, it would allow for more shopping. This, in turn, would strengthen the economy, making it even more difficult to bring down exorbitant consumer prices.

In February, the Committee for a Responsible Federal Budget, a nonprofit public policy organization, estimated that canceling all $1.6 trillion in federal student debt held by Americans would raise the rate of inflation rate of 10 to 50 basis points, or 0.1 to 0.5 percentage point within 12 months of the scheduled start of repayment. The current US inflation rate is 8.6%.

The Committee has not released an estimate of the impact on inflation of a $10,000 forgiveness per borrower, but the organization continues to qualify both the payment pause and debt forgiveness of “regressive and inflationary”.

Federal student loan payments remain suspended until August 31. Biden could approve another extension to the payment moratorium in light of rising interest rates and depending on the state of the economy in August, according to The Associated Press.

Since Biden took office, his administration has approved $25 billion in student loan forgiveness.

The Associated Press contributed to this report.

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