If Biden cancels student loan debt, how would it affect US economy — and your wallet?
The Biden administration will announce its decision regarding the cancellation of student debt within the next few months.
In an April 25 news briefing, press secretary Jen Psaki said the administration will make its choice before the end of the pause on student loans, which expires Aug. 31.
As about 41 million people in the U.S. who have federal student loans await the decision, many wonder how canceling student debt could affect the economy — and their wallets.
Here’s what experts say.
As of 2022, the U.S. government owns about $1.6 trillion of debt, Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, told McClatchy News on April 27.
To put that number in perspective, $1.6 trillion dollars is about twice the 2023 budget for the Department of Defense, at $773 billion.
What happens if student debt gets canceled?
If the Biden administration were to cancel student debt, the federal government would immediately become $1.6 trillion poorer, Goldwein said, but the impact on government debt would be gradual.
That means that every year, as the government stops receiving student loan payments — and the interest that comes with them — the debt will get worse, Goldwein said.
There could be an immediate effect, too, Goldwein says, as millions would suddenly have more money to spend. Canceling student debt could lead to a spike in inflation, raising “everybody’s prices a little bit.” If all student debt is forgiven, Goldwein says it could add up to half a point to inflation within the first year.
“So those people have a little bit more money to spend, not tons more, but a little bit more money to spend. And the government hauls a little bit less revenue,” Sandy Baum, nonresident senior fellow at the Urban Institute, a think tank focused on economic and social policy research, told McClatchy News on April 28.
As the debt increases, the federal government will have to make trade-offs, Baum explained.
“There will be other things that the federal government will decide not to do because people are concerned about the deficit and the debt,” Baum said. “So it’s hard to say what it is that we will sacrifice, but we will sacrifice in terms of other forms of federal spending.”
College borrowers will be better off, Goldwein says, “but they’ll be better off by making everybody else a little bit worse off in the immediate term because everybody’s gonna be paying higher prices for goods and services. Worse off in the medium term, because it’s probably going to push up tuition prices. And worse off in the long run because the government doesn’t have unlimited capacity.”
Canceling student debt could make college more expensive
Experts worry canceling student debt could lead to more students borrowing money for college expecting forgiveness down the line, which in turn, could lead to a rise in tuition prices.
“It’s like a Band-Aid that has bacteria on it because it’s going to help people that are currently financially burdened, but it’s actually going to make things worse for future college attendees,” Goldwein said.
The system is currently set up so people don’t have to pay more than what they can afford through the income-driven repayment programs, Baum says.
Through these plans, student debt is forgiven after 20 years of payments, McClatchy News previously reported.
“It’s perfectly reasonable, because education doesn’t pay off for everybody and those people, it shouldn’t ruin their lives,” Baum said. “But since we already have in place a system to pay off the debt for people who can’t afford it, we’re now talking about also paying off the debt for people who can afford it. And the people with the biggest debt are people who went to grad school: doctors and lawyers and so on.”
Earlier this month, the U.S. Department of Education announced measures to fix the federal student loan program and offer immediate debt cancellation for tens of thousands of borrowers.
“Right now, we have really low unemployment. We have high inflation. So it’s hard to think that what we need is a big help out right now,” Baum said.
While most adults under 29 years old support “some form of government action on student loan debt,” only 38% support total debt cancellation, according to a poll released April 25 by the Institute of Politics at Harvard Kennedy School.
This story was originally published April 28, 2022 at 1:46 PM with the headline "If Biden cancels student loan debt, how would it affect US economy — and your wallet?."
