Biden’s student-loan relief adds new wrinkle to inflation debate – Times of India

New Delhi: President Joe BidenA plan to forgive a portion of student loans held by millions will ripple through the economy as personal spending and savings shift, but no factor will be watched more closely than inflation.
Announcing the plan on Wednesday, the White House indicated that the move would have a competitive impact. On the one hand, it will reduce overall household debt and potentially provide more spending power. On the other hand, it provides a timeline for resuming payments that have been suspended for more than two years.
Overall, the combination of high savings and low debt could push inflation up by 0.1 to 0.3 percentage points, according to Michael Pugliese, an economist at Wells Fargo & Co. Bloomberg Economics sees the potential to add 0.2 percentage points next year. upward risk. Headline inflation, as measured by the Consumer Price Index, stood at 8.5% last month, near a 40-year high.

“In the grand scheme of things, it’s not huge,” Pugliese said of the fresh pressures, adding that there are outstanding details that would still affect his estimate. “But inflation is at a very alarming rate right now. At a time when the economy is already running very hot, it threatens to add more fuel to the fire. ,
While Biden and Democrats are using debt relief to court young and progressive voters before midterm in November as the party risks losing control of Congress, the decision has also driven criticism that his administration is consumer-oriented. Responsible for powered buoyancy. in prices, especially from the $1.9 trillion Covid-19 relief stimulus bill.
The effects of the relief will be widely felt. According to White House estimates, of the 43 million federal student loan takers, about 20 million will be in debt completely, with 90% of the help going to those who make less than $75,000 a year.
The recently passed Inflation Reduction Act is likely to counteract any deflationary effects, said Beth Akers, a senior fellow at the American Enterprise Institute on Bloomberg Radio’s Balance of Power.
George W. “It’s not really extreme inflation,” said Akers, a former staff economist on the Council of Economic Advisers under Bush. “That would add to inflationary pressures, but it’s still not a game changer in terms of the inflation debate.”
The Committee for a Responsible Federal Budget, a fiscal conservative group that lobbies for deficit reduction, also flagged that debt relief could weaken the deflationary effect of the IRA. It said Biden’s plan would cost up to $600 billion, and could add 0.15 percentage points to the Federal Reserve’s preferred inflation gauge, with added pressure over time.
The big driver for consumer prices in the coming months will remain the “interaction between a strong labor market and rising interest rates,” T. Blarina Urusi, US economist at Roe Price Associates, said. “Loan forgiveness on the margin will help a subset of the American consumer.”
As for the broader impact on the economy, extended pauses on repayments and a lighter debt load overall will support consumption, but “it still comes down to how eager people will be to spend in the current environment of high inflation and rising interest rates.” ,” said Sal Guatiri, senior economist at BMO Capital Markets. “The action will mitigate downside risks to the US economic outlook.”
While Biden’s plan to forgive a portion of student loans would ease the burden for millions of families, it also sees January as the end of the forbearance period. This means that millions of loan holders with debt of more than $10,000 or income levels outside government plan standards will have to resume payments for the first time since March 2020, leaving little left over for discretionary spending.
According to the Fed, student loan debt is more than $1.7 trillion, and is second only to mortgage balances as the largest component of American household debt.

student loan growth2

Biden stressed that the plan is aimed at working and middle-class families. The $10,000 in debt relief for most student-loan holders will be doubled for those receiving Pell grants. More than 90% of those grants are given to families whose income is less than $60,000 a year.
Professor Economist Arin Dubey of the University of Massachusetts Amherst said the loan waiver will have a long-term impact on household assets rather than an immediate impact on spending. School debt often deters first-time home buyers, so eliminating debt can reduce future expenses, he said.
“There are solid reasons to oppose the policy or support the policy,” he said. “But to me inflation is not a big part of the issue. It’s essentially a transfer of credit from the private to the government, and it’s being spread.”