Whether you’re an American or not, you’ve probably heard the horror stories about people straddled by student loan debt from their time at a US university. Well, following through on a campaign promise, US President Joe Biden announced a package that will cancel US$10,000 worth of student loan debt for most people and up to US$20,000 for some other cases. Politicians further left than Biden said he wasn’t going far enough to solve the problem of high debt rates and low income rates, while those on the right say it means blue-collar workers will have to pay for college students’ tuition.
On the global scale, the question worth asking is whether or not the move will exacerbate the already historic inflationary pressures in the US right now. On the one hand, economists say that when you cancel debt like this, it can increase demand for all sorts of other things, leading to higher inflation rates. But, on the other hand, experts have been worried about a recession, and increasing consumer demand and spending would, in theory, help curb that.
There are some things to keep in mind here, though. For one, the Fed has said before that while growth is important to avoid a recession, the main concern right now is inflation – and many worry that this cancellation may increase inflation. The thing is, this student loan cancellation isn’t going to have immediate effects because people usually pay off their loans over time. So, it won’t be a massive chunk of the budget coming out right away but rather a slow burn that will happen over a few decades. Plus, the move will also resume student loan payments, which have been paused for nearly two and a half years, meaning money is circulating back in.
“The burden is so heavy that even if you graduate you may not have access to middle-class life that the college degree once provided,” said Joe Biden from the White House. “I made a commitment that we would provide student debt relief. And I’m honoring that commitment today.”
“The inflationary impact its certainly positive, but I don’t think it would be much. We’re talking about a pretty small impact,” said Kent Smetters, a faculty director at the Penn Wharton Budget Model, an economic research branch at the University of Pennsylvania.