Student loan forgiveness raises concern over impact on inflation: poll

Some Americans are worried about the impact that widespread student loan forgiveness could have on inflation, according to a recent poll.

More than half of Americans (59%) said they were concerned that student loan forgiveness would make inflation worse, the CNBC/Momentive poll said. 

And when viewed by political affiliation, the poll said that Republican respondents were particularly concerned. More than three quarters of Republicans (81%) said that student loan forgiveness will make inflation worse, nearly double the number of Democrats who said the same (41%).

The poll was conducted prior to President Joe Biden’s announcement last week that his administration will cancel $20,000 in student loans per borrower if they went to college on Pell Grants and $10,000 in student loan debt per borrower for those who didn’t. The cancellation will apply to all federal student loan borrowers making less than $125,000 per year, or $250,000 per year for married couples. They also unveiled a proposal that would allow those who have undergraduate loans to be able to cap their repayment at 5% of their monthly income.

Sen. John Thune, R-S.D., also expressed his concern last week during an interview on Fox News’ "Your World with Neil Cavuto," saying that the plan might increase inflation and that it is unfair to taxpayers who didn't have student loans. 

"[Student loan forgiveness] will increase the cost of college education because tuition costs are going to go up," Thune said. "And I think it will add to inflation because it's pumping more money out into the economy at a time when we have record 40-year-high inflation."

The Biden administration has not given a final price tag on what the plan will cost. So far, estimates put the price north of $500 billion. 

The Committee for a Responsible Federal Budget, a non-profit public policy organization based in Washington, D.C., estimated that the plan will cost $500 billion and "would meaningfully boost inflation by 15 to 27 basis points over the next year."

And the Penn Wharton Budget Model estimated that the cost of debt cancellation alone would be between $469 billion to $519 billion and that loan forbearance would cost another $16 billion. The proposed new income-driven repayment option is estimated to add $70 billion to the plan's price tag, increasing total package costs to $605 billion.

Only borrowers with federal student loans are eligible for forgiveness under the Biden administration's plan. But if you have private student loans, you could consider refinancing to help you save on your monthly payments. You can visit Credible to find your personalized rate without affecting your credit score.

HERE'S HOW THE STUDENT LOAN PAYMENT PAUSE IMPACTED BORROWERS' CREDIT SCORES 

Experts divided on how consumers will use extra cash

The student loan forgiveness plan is expected to provide debt relief for some borrowers. But experts' opinions vary on the impact of the extra cash.

Mark Kantrowitz, president at PrivateStudentLoans.guru, explained that because all borrowers who qualify for loan forgiveness already benefited from the payment pause and interest waiver, the newly announced forgiveness plan shouldn't have an immediate impact on their discretionary income. 

"While people like to focus on the overall cost of loan forgiveness, the impact on the economy and inflation is based on the impact on loan payments, which is about $30 billion a year. That's about 0.1% of GDP," Kantrowitz said. "One also has to consider the change relative to the previous month, not the change relative to the pre-pandemic milieu, to evaluate the impact on inflation."

Once student loan payments restart in January 2023, Kantrowitz said he expects the Consumer Price Index (CPI) to be reduced by "roughly 0.2% of GDP" as student loan borrowers shift from putting their money toward goods, services and savings to repaying their student loans.

Another expert said he sees student debt cancellation as a massive injection of stimulus to the U.S. economy that could significantly contribute to higher inflation. 

"For borrowers resuming payments next year, new provisions will reduce monthly payment requirements dramatically relative to income," Wes Moss, CFP, partner at Capital Investment Advisors, said. "In some cases, the minimum monthly payment could be reduced by more than 50%. This puts more money into the pockets of consumers to spend on discretionary goods and services and will act as a further economic stimulus that could put upward pressure on inflation." 

If you have private student loans, these will not qualify for federal student debt cancellation. However, you can reduce your monthly payment by refinancing to a lower interest rate. Visit Credible to find your personalized interest rate without affecting your credit score.

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The impact on private student loans

While there is no debt relief for private student loans, the federal forgiveness plan could have a ripple effect on this sector. 

One potential positive outcome is that with more money in their pockets, borrowers are more likely to be able to repay their private student loans, analysts told the American Banker. 

In early 2020, 75.3% of private student loans were in repayment, while 20% were in deferment, according to the Education Data Initiative. These loans currently make up 8.4% of the total outstanding U.S. student loans.

However, Josh Miller, the head of household acquisition and checking product management at KeyBank, said that over the long term, student loan debt cancellation and reduction could make private lending less appealing to borrowers. 

"Eventually, it could result in a situation where private lending options dry up and student education is funded entirely by the government, with the burden ultimately falling upon American taxpayers," he said. 

One way to reduce your monthly payment on your private student loans is by refinancing to a lower interest rate. To see if this is the right option for you, you can contact Credible to speak to a student loan expert and get all your questions answered.

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