As President Joe Biden announces his plan to forgive student debt, economists have already begun debating whether the action could compound the surging inflation that continues to bedevil the U.S. economy.
What to know about Student Loan Debt Forgiveness
Among the most prominent voices warning that the forgiveness would lead to increased inflation has been Larry Summers, former treasury secretary and Harvard University president emeritus, who voiced his opinion in a series of tweets Monday.
"I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief," he wrote. He said the debt relief would translate into increased spending, which would in turn increase overall demand and, thus, inflation.
The Committee for a Responsible Federal Budget, a nonpartisan, nonprofit organization focused on fiscal policy issues, echoed the concerns, writing on Aug. 16 that $10,000 of debt cancellation would add 0.15% to one common measure of inflation, the Personal Consumption Expenditure, or PCE, price index, with a compounding effect over time.
The PCE price index is a more comprehensive measure for the price of goods and services than the more commonly watched measure of inflation, the Consumer Price Index, or CPI. Unlike the CPI, the PCE has not shown signs of slowing.
Plus, debt forgiveness would cancel out the impact that the recently enacted Inflation Reduction Act is projected to have on tackling inflation, the group said.
"Debt cancellation would boost near-term inflation far more than the IRA will lower it," it said.
Other economists disagree. In a series of tweets Wednesday, New York Times columnist and former Princeton University economist Paul Krugman dismissed the inflation arguments, writing that the relative impact of canceling the debt would be small compared with the size of the U.S. economy and that any potential increase in spending would be moderated by the Federal Reserve's plan to tighten financial conditions.
"The argument 'but it will be inflationary' seems so obviously wrong, so inconsistent with the math, that, as I said, it’s baffling," Krugman said.
Another economist believes that as long as the moratorium on student debt repayments comes to an end, the inflationary impact of debt cancellation will ultimately prove "largely a wash."
As people start repaying their loans, they'll have less money to spend on discretionary items, like clothes and going out to eat, said Mark Zandi, chief economist at Moody’s Analytics. Less spending can spur less demand, which could slow down inflation.
Economists will continue to debate the inflation impact question, said Victor Bennett, professor of entrepreneurship and strategy at the University of Utah's Eccles School of Business.
He said questions linger about whether the benefits of Biden's plan will fall mostly on wealthier individuals, who tend to spend less of their overall household budgets, and how long the economy continues to experience higher-than-expected inflation.
Higher consumer prices in the near term, plus the growing uncertainty about an economic recession, could encourage people to save more of their money.
"[It] depends on whether the beneficiaries start spending [more], and that’s an open question," Bennett said.