Biden student loan handout could worsen inflation crisis, analysis shows

President Biden on Wednesday announced plans to cancel student loan debt for millions of borrowers nationwide, but the relief effort could ultimately exacerbate the ongoing inflation crisis, according to a new analysis.

The Committee for a Responsible Federal Budget (CRFB), a nonprofit based in Washington, argued that Biden's executive order — which will wipe out $10,000 in debt for borrowers earning less than $125,000 and $20,000 for Pell grant recipients — could inflame inflation, which is already hovering near a four-decade high.

"This announcement is gallingly reckless, with the national debt approaching record levels and inflation surging, it will make both worse," said Maya MacGuineas, CRFB president. "Policymakers have already spent $300 billion on student debt relief — none of it paid for — and this would add another $400 to $600 billion, again, none of it paid for."

The White House has weighed for months whether to cancel some federal student loan debt. Biden campaigned on erasing at least $10,000 in student loan debt for most borrowers and has since floated income-based parameters that would cut off forgiveness for any household earning more than $125,000.

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However, the matter has been complicated further by the soaring prices of everything from food to gasoline to rent, with fears that wiping out billions in loan debt could make inflation worse.

Critics, including former Treasury Secretary Larry Summers, have argued that putting more money back into borrowers' pockets could keep inflation painfully high in the coming months and years.

"I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief or micro economically by encouraging college tuition increases," Summers, a Harvard University professor, wrote in a series of tweets this week.

Erasing debt will also add to the nation's already ballooning national debt, which surged to a record-high $30 trillion last year. 

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Separate findings from the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School, show that a one-time forgiveness of $10,000 per borrower would cost about $300 billion if the policy is limited to individuals with incomes less than $125,000. The cost jumps to $330 billion if the program continues over the next decade, and would cost $344 billion if the White House scrapped the income limits.

"This action by the White House is completely at odds with their talk of deficit reduction," MacGuineas said. She noted that forgiving billions in student loan will add twice as much to the nation's deficit — which at $2.8 trillion in fiscal year 2021 is the second-highest in history — and undo the $300 billion included for deficit reduction in Democrats' Inflation Reduction Act.

"With the stroke of a pen, the president undid a year's worth of work on the fiscal front," she added.

Benefits from the executive order will mostly go toward top earners. Between 69% and 73% of any debt forgiven would accrue to households that are in the top 60% of income distribution in the U.S., according to the Penn Wharton analysis.

Biden also announced on Wednesday that he intends to extend the federal student loan payment pause that was poised to expire at the end of August. The freeze — which also set the interest rate to 0% — began in March 2020 at the onset of the coronavirus pandemic.

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About 41 million Americans are benefiting from the federal government’s pause on student loan payments, which has been extended six times — twice by former President Trump and four times by Biden. At least $72 billion has been provided in relief on student loan interest alone.