Biden student loan forgiveness impacts millions, raises inflation questions

President Joe Biden said on Wednesday the U.S. government will forgive $10,000 in student loans for many debt-saddled college graduates, a move that could boost support for his fellow Democrats in the November congressional elections but also may fuel inflation.

Canceling the debt will free up hundreds of billions of dollars for new consumer spending that could be aimed at homebuying, according to economists who said this would add a new wrinkle to the country's inflation fight.

"Earning a college degree or certificate should give every person in America a leg up in securing a bright future. But for too many people, student loan debt has hindered their ability to achieve their dreams - including buying a home, starting a business or providing for their family," Education Secretary Miguel Cardona said in a statement.

The White House said the country's "skyrocketing cumulative federal student loan debt - $1.6 trillion and rising for more than 45 million borrowers - is a significant burden on America's middle class."

Biden was expected to speak on the matter on Wednesday at the White House.

Many Democrats had pushed for Biden to forgive as much as $50,000 per borrower, but cheered his action.

Republicans, seeking to regain control of Congress in November, oppose the move, arguing it is unfair because it will disproportionately help people earning higher incomes.

"President Biden's student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt," Senate Minority Leader Mitch McConnell said Wednesday.

U.S. consumers carry a massive $1.75 trillion in student loan debt, most of it held by the federal government, the result of university tuition fees substantially higher than in most other rich countries.

PANDEMIC PAUSE, PELL GRANTS

Biden's administration will extend a COVID-19 pandemic-linked pause on student loan repayment to the end of the year, while forgiving $10,000 in student debt for borrowers whose income falls below $125,000 a year, or $250,000 for a married couple, the White House said. The forgiveness could impact 8 million borrowers automatically, the Department of Education said, while others would need to apply for forgiveness.

The government is also forgiving up to $20,000 in debt for recipients of federal Pell Grants, some 6 million students from low-income families, and is proposing a new rule that protects some income from repayment plans and forgives some loan balances after 10 years of repayment, the Education Department said.

Cutting $10,000 in federal debt for every student would amount to $321 billion of federal student loans and eliminate the entire balance for 11.8 million borrowers, or 31% of them, a New York Federal Reserve study shows.

Borrower balances have been frozen since the beginning of the COVID-19 outbreak, with no payments required on most federal student loans since March 2020.

INFLATION IMPACT

A senior Biden administration official told reporters the student loan forgiveness plan could benefit up to 43 million student borrowers, completely canceling the debt for some 20 million.

But after Dec. 31, the government will resume requiring payment on remaining student loans that were paused during the COVID 19 pandemic. The official said this move would offset any inflationary effects of the forgiveness. Payment resumptions could even have a dampening effect on prices, the official said.

The White House view contrasts with that of former Treasury secretary Larry Summers, who said on Twitter that debt relief "raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college.

It will also tend to be inflationary by raising tuitions." Moody's analytics chief economist Mark Zandi sided with the White House, saying the resumption of billions of dollars per month in student loan payments "will restrain growth and is disinflationary."