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Nicklaus: Student loan forgiveness may be popular, but it’s likely to make inflation worse

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Biden Student Loans

President Joe Biden speaks about student loan debt forgiveness in the Roosevelt Room of the White House, Wednesday, Aug. 24, 2022, in Washington. Education Secretary Miguel Cardona listens at right.

David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

There’s no question that our costly higher education system saddles some students with too much debt. President Joe Biden’s loan forgiveness plan, however, is the wrong solution at the wrong time.

For one thing, it’s likely to contribute to inflation. The nonpartisan Committee for a Responsible Federal Budget estimates that the plan will create $500 billion in new deficit spending, adding to demand in an economy that the Federal Reserve is desperately trying to cool down.

The committee projects that the spending will produce between 0.2 and 0.3 percentage points of extra inflation next year. That may not sound like a lot, but it makes the Fed’s job harder and increases the chances that we’ll have a recession before the central bank can cut inflation down to size.

Such worries aren’t just coming from fusty think tanks. Two prominent Democratic economists, Larry Summers and Jason Furman, also argue that loan forgiveness will make inflation worse. “Pouring roughly half a trillion dollars of gasoline on an inflationary fire that is already burning is reckless,” Furman wrote on Twitter.

Debt forgiveness raises fairness issues too. The White House argues that most of the plan’s benefits go to low- and middle-income Americans, but Biden is forgiving up to $20,000 in debt for households earning as much as $250,000 a year.

College debt: President Joe Biden is considering an order that would wipe out $10,000 of student debt for many borrowers. David Nicklaus and Jim Gallagher argue that it's a bad policy and would disproportionately benefit high-earning graduates.

That includes a lot of recent law school or medical school graduates whose lifetime incomes will be much higher than their current salaries. They invested in their own human capital and would have had no trouble repaying the debt, but Uncle Sam is canceling some of it anyway.

Speaking of fairness, why do college graduates deserve help at the expense of other hard-working taxpayers who have already paid off their debt, or who didn’t attend college at all?

While Biden’s plan fulfills a campaign promise and clearly helps some people, it does nothing to address higher education’s underlying affordability problem.

The Committee for a Responsible Federal Budget estimates that, even if all eligible borrowers receive loan forgiveness, student debt will return to its current level of $1.7 trillion in five and a half years.

“This is a tiny little Band-Aid on a big stink bomb of a problem,” said Glenn MacDonald, professor of economics and strategy at Washington University’s Olin Business School. “All this does is take a bunch of money from some people and give it to other people. It doesn’t fix education, it doesn’t fix education financing, and it doesn’t fix poverty.”

Biden’s plan is likely to make things worse by creating a moral hazard. Both students and colleges may figure that if politicians wiped out debt once, they’re likely to do it again. Students may borrow more, figuring that they’re suckers if they don’t take advantage of the largesse. Universities may view the generous forgiveness plan as a signal that they can raise tuition even faster.

Biden’s plan does contain sensible elements. It makes income-based repayment plans, which some borrowers have found difficult to understand in the past, easier to qualify for, and it eliminates payments entirely for some low-income borrowers.

If the president had just focused on structural reforms, he might have made a dent in the nation’s college affordability problem without exacerbating its inflation problem. Instead, his $500 billion in handouts is likely to make both problems worse.

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David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

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