Biden’s student loan plan is sparking heated debate among economists

President Joe Biden, left, with Education Secretary Miguel Cardona as they discuss a student loan debt relief plan in the Roosevelt Room of the White House in Washington on August 24, 2022. (Al Drago/The New York Times)

WASHINGTON — President Joe Biden’s plan to forgive some student debt has sharply divided liberal economists and put the White House economic team at odds with both independent analysts and veterans of previous Democratic administrations.

Areas of contention include how much the debt relief package and other changes to student loans will cost taxpayers, and whether the plan “pays” in fiscal terms. The plan’s impact on inflation, which is rising rapidly, and the extent to which it will help those most in need are also matters of contention.

The plan, announced last week, includes loan forgiveness of up to $10,000 for people earning $125,000 or less and an additional $10,000 for borrowers from low-income backgrounds who received Pell Grants in college. Biden also proposed changes to future loan repayment plans that would lower monthly costs and eliminate accrual interest for potentially millions of lower-income borrowers who keep up payments.

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White House officials have offered some estimates of who would benefit most from the moves and how much they could reduce federal revenue. Officials have explained why the package will not increase inflation. And they have claimed it will be “paid for,” though not in any way that budget experts agree fits that term.

Conservative economists attacked the plan, arguing it would fuel higher inflation and saddle taxpayers with hundreds of billions of dollars in new debt. Some liberal economists have defended it as a lifeline for graduates hit by the rising cost of higher education.

Here’s a quick guide to some of the financial controversies Biden’s plan has sparked.

How much will it cost?

Forgiving existing debt and reducing the extent to which some future debt will be repaid will affect the revenue stream for the federal government and increase budget deficits. But it is very difficult to say how big this increase will be, for several reasons.

For starters, it’s unclear what percentage of eligible borrowers will go through the process to request debt forgiveness from the Department of Education, which has yet to establish the forgiveness program. It’s also unclear how many people applying for debt cancellation would have paid off their entire balance if Biden had taken no action. Each of these variables could significantly affect the overall cost in lost revenue.

Outside groups tried to estimate the total cost. The Committee for a Responsible Federal Budget estimates the budget impact at about $440 billion and $600 billion over a decade. The University of Pennsylvania’s Penn Wharton budget model estimates just over $600 billion over 10 years.

The White House will not complete a formal cost estimate of the plan until the winter at the earliest, according to the White House budget office. However, officials say these outside estimates are too high. The budget office estimates that one part of the program, debt relief of up to $20,000 per borrower, would reduce loan payments to the government by $24 billion annually over the next decade, assuming three-quarters of borrowers participate in the program .

Administration officials also claim the plan is “paid for” — because the federal deficit is set to shrink by at least $1.7 trillion this year compared to last year. In interviews, officials say the nation’s improved fiscal picture has given Biden confidence that debt relief is within reach.

“It’s paid for and far more than the amount of deficit reduction we’re already on track for this year,” Bharat Ramamurti, deputy director of the National Economic Council, told reporters on Friday.

That’s not how “paid” usually works. The budget deficit is narrowing in part because of increased tax revenue but also because the government borrowed trillions more than usual last year to pay for a $1.9 trillion stimulus package aimed at helping people, businesses and the government weather the pandemic. Officials actually argue that they are paying for student loan relief in part by not borrowing more money for pandemic aid.

Will inflation rise?

This is an argument about economic base prices with real implications for American shoppers, who are experiencing the fastest price increases in 40 years. Some economists, including Harvard’s Jason Furman and Lawrence H. Summers, both former top economic officials in Democratic presidential administrations, have warned that canceling student debt will increase inflation. Their reasoning: By reducing or eliminating future loan payments, consumers will have more money to spend. While borrowers will not receive checks from the government, they will be relieved of the financial burden of monthly payments.

“Pouring about half a trillion dollars of gasoline on an already burning inflationary fire is reckless,” Furman tweeted last week.

White House economists such as Jared Bernstein of the Council of Economic Advisers countered that the sum of Biden’s moves would not increase inflation. That’s because Biden also announced last week that after a nearly three-year “pause” in federal student loan payments due to the pandemic, they will begin again in January. Goldman Sachs researchers agree the plan will not worsen inflation, saying reduced purchasing power from resuming interest payments will more than offset the boost from loan write-offs.

Critics of inflation say the calculation uses dubious economic math, as the pause in payments was never intended to be permanent. If your basic assumption was that people would start paying their loans again soon, adding in forgiveness is inflationary, to some extent.

The actual rate of inflation does not take into account core prices. It largely depends on how much money consumers have to spend (and how few goods and services there are for consumers to buy). Inflation is unlikely to jump again next year as a result of Biden’s plans, according to Goldman Sachs and other forecasters. But it could be at least slightly higher than it would have been if it had simply ended the moratorium and not announced any debt relief.

In that sense, to use Furman’s metaphor, Biden’s actions could be less like pouring gasoline — which causes flames — and more like adding another log when the fire starts to burn, keeping the heat steady. .

Who will benefit?

Penn Wharton’s early modeling of Biden’s plan, with more generous benefits to low-income borrowers and income limits on who gets debt relief, found that nearly three-quarters of the plan’s benefits would go to low- and middle-income — as won, with hardly anyone at the top.

Some critics say the plan is still a gift to the rich — or, more specifically, to people who will become rich sometime soon, like young doctors and lawyers just starting out in their fields. Those critics have pushed the White House to produce an analysis that effectively predicts the policy’s effects on different borrowers when they look at their expected lifetime earnings, in the belief that it will show a much larger variance toward the top. Officials say that’s not possible without a lot more detailed work.

Penn Wharton attempted a rough approach to this kind of analysis, estimating the program’s effects only on borrowers aged 25 to 35. But it found virtually no change in results: Among people in that age group, the bulk of the benefits were still in households earning between $29,000 and $88,000 a year.

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