Biden’s Student Loan Plan Sets Off Fierce Debate Among Economists

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 with last year. In interviews, officials say the nation’s improving fiscal picture has given Mr. Biden confidence that debt forgiveness is affordable.

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

That’s not how “paid for” usually works. The budget deficit is coming down 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 government endure the pandemic. The officials are effectively arguing that they are paying for student loan relief in part by not borrowing more money for pandemic aid.

Will inflation go up?

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

“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Mr. Furman wrote on Twitter last week.

White House economists, like Jared Bernstein of the Council of Economic Advisers, have countered that the sum of Mr. Biden’s moves will not add to inflation. That is because Mr. Biden also announced last week that after a nearly three-year “pause” in federal student loan payments for the pandemic, they will restart in January. Researchers at Goldman Sachs agree that the plan won’t worsen inflation, saying the reduced buying power from restarting interest payments will more than offset the boost from loan forgiveness.

Article source: https://www.nytimes.com/2022/08/30/business/economy/biden-student-loans-economists.html