Michael Hiltzik is my favorite columnist in the Los Angeles Times. He recently wrote a wonderful column explaining patiently why canceling some or all college student debt would not be inflationary, as Republicans claim, but instead would be good for the economy.
He writes:
With a deadline looming in less than two weeks for President Biden to decide what to do about student debt, it shouldn’t be surprising that conservatives have been agitating with increasing intensity against relief for the borrowers.
Among their principal arguments recently is that debt relief would be inflationary.
The deficit hawks at the Committee for a Responsible Federal Budget, for example, fretted last week that forgiving even $10,000 in student debt per borrower would be so inflationary that it would destroy a decade’s worth of inflation reduction from Biden’s newly enacted Inflation Reduction Act.
Student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity — all without increasing inflation.
— Mike Konczal and Alí Bustamante, Roosevelt Institute
A bill filed by Republican members of Congress Elise Stefanik of New York, Patrick McHenry of North Carolina and Jason Smith of Missouri cites canceling student debt as among “harmful economic policies” by the Biden administration that have “exacerbated inflation and led to skyrocketing prices.”
I’ve written about the fatuous arguments against student debt relief before. The inflation angle is relatively new, however, presumably because inflation is top of mind for voters as we approach the midterm elections. It’s natural, in a way, for opponents of debt relief to bootstrap this kitchen table issue to their long record of opposition.
As it happens, however, they’re wrong. Canceling student debt, even at higher levels, won’t drive inflation. The critics are using faulty math to make their point.
“Student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity — all without increasing inflation,” according to Mike Konczal and Alí Bustamante of the Roosevelt Institute, who expertly refuted the CRFB’s analysis the day after it appeared.
Before getting into the economics of the issue, a few words of context.
Biden’s deadline actually applies to only a portion of student debt policy: the forbearance that has been granted borrowers since March 2020 in recognition of the burdens of the pandemic.
Since then, borrowers with federally backed loans (which is more than 90% of the indebtedness ) haven’t had to make payments, and interest hasn’t accrued on unpaid balances in that time.
Under current policy, the payment freeze will end on Aug. 31. Biden could extend it by executive order; the Washington consensus is that he will do so, perhaps to the end of this year so payments won’t have to resume prior to the election
The other aspect concerns cancelling student loans. For many of the 45 million borrowers currently owing a total of about $1.8 trillion today, this issue is far more consequential.
Biden pledged during his presidential campaign to forgive $10,000 per borrower. Progressives such as Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have advocated cancelling $50,000. Others support cancelling full balances for some middle- and low-income borrowers. That decision doesn’t have to be made immediately, though some Democratic advocates think the policy would be favored by Democratic voters in November.
Some traditional arguments against student debt relief can be easily dismissed. One is that forgiving debt today would be unfair to borrowers who shouldered the sacrifice of paying off their loans. As I wrote in the past, this is the argument from pure selfishness and a formula for permanent governmental paralysis.
The truth, of course, is that in a healthy society government policy moves ahead by taking note of existing inequities and striving to address them. Following the implications of the “I paid, why shouldn’t you” camp to their natural conclusion means that we wouldn’t have Social Security, Medicare or the Affordable Care Act today.
The unfairness argument also overlooks the generations of college students whose education was financed by taxpayers to a far greater extent than today. Tuition at the University of California, for example, was free to state residents from its founding in the 1860s until 1970.
UC tuition today is $13,104 per year for residents and $44,130 for nonresidents, and constitutes what the UC says is its “largest single source of core operating funds.” Should today’s tuition-burdened students demand back pay from those pre-1970 enrollees?
Another common argument is that debt cancellation would be regressive — that is, it would disproportionately benefit the rich. The heart of this argument is that wealthier households carry more debt than low-income households, so they would gain more from reducing their balances.
But that’s math-driven misconception. The truth is that the student debt burden falls much heavier on lower-income borrowers than the affluent.
Contrasting borrowers in the poorest 10% of income earners with those in the richest 10%, Laura Beamer and Eduard Nilaj of the Jain Family Institute showed that although “higher-income groups experience higher median debt burdens ($23,160 for the richest decile and $16,094 for the lowest-income decile), this difference is small compared to the difference in median incomes ($60,193 for the richest decile and $16,770 for the lowest-income decile).”
Even cancelling $10,000 in debt would be a greater boon for lower-income borrowers than the rich. Among borrowers with $20,000-$40,000 in income, 234,000 carry balances below $15,000, Beamer and Nilaj calculated. About 57% of borrowers in that income range have balances of less than $20,000, compared to 43% of those with income of $75,000 or more.
Nor is there any doubt that debt cancellation would have a strong impact on racial and ethnic economic inequality. About 75% of Black borrowers have current loan balances greater than the original loans, due mostly to difficulty in making repayments, compared to 50% of white borrowers.
Once repayments resume, the New York Federal Reserve Bank reported in April, “lower-income, less educated, non-white, female and middle-aged borrowers will struggle more in making minimum payments and in remaining current.”
That brings us back to the newest wrinkle in the anti-relief argument: That debt relief will be inflationary and add to the deficit.
The CRFB is perhaps the most ferocious deficit scold among conservative think tanks in Washington. It’s a full-spectrum fiscal critic. To its credit, it was critical of the GOP’s massive tax cut for the rich in 2017, but it has also pursued benefit cuts in Social Security and Medicare, a reflection of the long patronage of the late hedge fund billionaire Pete Peterson, who conducted a long campaign to shrink those programs.
The CRFB analysis of student debt relief asserts, “Simply extending the current repayment pause through the end of the year would cost $20 billion — equivalent to the total deficit reduction from the first six years of the IRA …. Cancelling $10,000 per person of student debt for households making below $300,000 a year would cost roughly $230 billion.”
Put these two options together, the group states, and “these policies would consume nearly 10 years of deficit reduction from the Inflation Reduction Act.” Its analysis further states that “debt cancellation would boost near-term inflation far more than the IRA will lower it. A $10,000 cancellation, according to the CRFB, could add .15 percentage points to the inflation rate “up front and create additional inflationary pressure over time.”
Konczal and Bustamante found some suspect math in this reasoning — specifically the comparison of apples to oranges by applying formal federal budget rules instead of real-world accounting.
Under the formal rules for credit programs, cancellation of debts must be treated as though the foregone interest and principal payments all occur immediately, in year one, when in fact they’re spread over the life of the loan. The Inflation Reduction Act, similarly, is treated as though all its inflation effect occurs in the first 10 years, when it’s also spread over two decades or more.
The CRFB’s analysis therefore overstates the impact of debt cancellation on the IRA’s inflation reduction. This flaw should be obvious. Spread over the decades-long terms of student loans, the foregone debt payments come to about $13 billion a year.
“It’s about allowing borrowers to keep $13 billion a year in income,” Bustamante told me. “That comes to about 0.08% of total personal consumption.” For an economy with about $16.5 trillion in annual personal spending, $13 billion is “insignificant when it comes to inflationary pressure.”
Nor is there any evidence that people would go out and spend that money, creating inflationary demand. The evidence from more than two years of debt forbearance thus far is that borrowers have used it to improve their household balance sheets, paying off high-rate credit card debt and saving the rest.
That’s not even to mention what has been driving inflation over the last year. It’s not demand-side personal consumption, but constraints such as supply-chain disruptions and restricted supplies of oil. Both factors have decreased in recent months, which is why the month-over-month inflation rate in July fell to 0.0%. (The Federal Reserve may be making the same mistake in its inflation-fighting campaign.)
The power of inflation as a scare word just now must explain the rhetoric employed by Stefanik, McHenry and Smith when they introduced their attack on debt relief in July.
Stefanik represents the sixth-poorest congressional district of New York’s 31, with a median income of $57,320. McHenry’s is the fifth-poorest in North Carolina, with a median income of $53,189. Smith’s is the poorest in Missouri and the 22nd-poorest of all the 435 districts represented by fully voting members.
That suggests that their own constituents would be in line for the most help from student loan forbearance and cancellation, including help dealing with prices at the pump and the supermarket. In this case as in many others, we must ask who these politicians are working for — certainly not the people who elected them.
Clearly, student debt relief will be a wealth-producing, economy-growing initiative. It won’t create unfairness, but redress economic injustice that has been building for decades. Biden’s proper course should be obvious.
Putting money in the hands of the working class will always contribute to the economy because they will spend the money on necessities unlike the wealthy that often put extra cash into passive income. Student debt is keeping young families from setting up their own household. They often stay with parents for much longer than past generations.
The most vocal argument I have heard against relieving student debt is conservative talking point about personal responsibility. Conservative blue collar workers that never attended college resent using their tax dollars to forgive the debt of people that borrowed money to attend colleges they couldn’t afford. They feel the public should not be on the hook for the reckless borrowing of others.
We are currently paying $800 billion per year for military contractors and other military expenses (not including off-budget expenses). We literally lost over a trillion just in Iraq alone. We’ve poured nearly $60 billion into the corrupt cesspool of ukraine just this year. Billions more to Israel and Saudi Arabia to help slaughter Palestinians and Yemenis. We routinely dole out billions to corporations, including $800 billion in PPP loans, very little of which went to the small companies they were designed to help and much of which has been cancelled. No one seriously thinks that cancelling student loan debt would have an inflationary effect. They don’t care about inflation, they care about ordinary Americans getting even a sliver of the pie reserved for corporations and billionaires.
BTW, speaking of serious thinking, does anyone believe that the architect of the bankruptcy bill that made student loans non-dischargeable in bankruptcy is going to cancel any meaningful amount of student loan debt? He’s wasn’t known as the senator from Visa for nothing. We’ll get a minimal amount of highly means-tested, contingent “relief” that Democrats will crow about being the “largest package of debt relief in history!” but which will benefit practically no one.
Yep, yep and yep!
Well stated, Dienne!
The main problem being that if those debts were cancelled the BANKSTERS couldn’t rob us blind as much. They might have to forgo another yacht or luxury car or private jet or 3rd or 4th vacation home.
You’re correct dienne77. I remember a time that government was in the business of regulating big business. Our government now subsidizes big business and “college” has now become another big business.
Always this useless blah, blah, blah that leads to absolutely nowhere! Take a very close at Cuba (yes that naughty communist country) being able to afford FREE EDUCATION from Kindergarten all the way through to university.
Vera, I am sorry to remind you that while Cuba has free education, it forbids freedom of thought. Students are propagandized from their first day of school to their last day of university.
Free education without intellectual freedom is worthless.
Also, in those countries that offer “free” college, NOT every asshole attends college like here, only the academically proficient do. In Germany, which is the poster child for free college, at the age of 12-13 children are vetted; it is then determined if they will learn a trade, attend tech school, or attend the university.
The US used to have many free colleges and universities, like CUNY, where poor and working class kids could get a good education and become productive citizens.
Bob Carlson…..I don’t think “tracking” like they do in Germany or the UK is a very bad idea. Here in the US, every kid (even if they don’t want to) now is pushed to attend college to obtain a degree for a mediocre paying job.
I agree but try that here and may parents will go ballistic that their little genius is not “qualified” to attend college. Germany doesn’t have near the universities that we have here, probably because it’s not a “business” over there.
How come Cuba can afford FREE education for all – from Kindergarten right through/including university??? vg
Money has no intrinsic value. It will be useless on a dead Earth. David Korten (Consortium News)
>
Money?
What money? It’s all plastic now.
No plastic in Cuba.
There is some credit card usage in Cuba. But, I don’t understand what you are getting at. Please elaborate. Thanks!
No American credit cards are accepted in Cuba.
But others are. And the main reason for no American credit card companies doing business there is the over 60 year ongoing economic “blockade” of Cuba. A blockade that is unconscionable.
It’s not just Republicans dear investing about student loan forgiveness.
Self proclaimed “Democrats” like Larry Summers are also doing it.
Why anyone would listen to Summers after all his wrong past prognostications and policies is beyond me.
Fearmongering, not dear investing
If folks like Summers were actually interested in the causes of the current high inflation they would focus on why the major oil companies and grain distribution companies are posting record profits over the previous year.
Just a handful of large oil companies set gas and fuel oil prices and are making profits that are over twice what they made in 2021.
And the same is true for the companies that control the grain market, which have have effectively set the price of bread and other staples 20% higher for billions of people around the world
And also posting record profits, not coincidentally.
The same thinking applies to a livable wage instead of minimum wages.
The same thinking applies to the Eisenhower tax rate on the wealthiest Americans.
Putting more money in the hands of the working class (90+% of the population) instead of the wealthy class (less than 10% of the population) means hundreds of millions of working class Americans will have more money to spend on lifestyle choices and products, boosting the economy while the wealthy class has less money to horde and invest, that they’ll never spend.
Excuse student debt.
Pass the livable wage act based on the cost of living for each state, county, city, town, village, farm and ranch.
Pass universal health care, getting insurance companies out of our health rights.
Raise taxes on the wealthiest Americans earning more than $500,000 annually and/or worth more than five-million dollars in gross wealth. Tax the wealthy at every level: higher federal tax, higher state income tax, higher property tax, et al.
Have a death tax of 99% for every dollar inherited over $1,000,000.
Get rid of tax free status for fake nonprofits like the Gates foundation.
All student loans that have compound interest should be immediately converted to simple interest at the prevailing personal loan rate — and all interest that has been added to any loan as a result of Compound Interest must be removed from the loan balance. Compound interest has resulted in people OWING MORE ON THEIR LOANS THAN THEY BORROWED IN THE FIRST PLACE in spite of faithfully making payments each month. That’s EVIL!!!
As a single parent, my girls attended college on scholarships, grants, their jobs and my income. They chose schools they could afford and are now teachers and medical researchers. My son (in his 40s) chose to go the military route and is retired and now attending college. He is more interested in the trades and is encouraging his children to do the same. Some states, i.e. Alabama is one, who will give free college tuition to military if they have lived there 5 years. I object to paying for college degrees for people earning far more than I. Some of these colleges can easily afford to lower their costs. If students cannot take financial responsibility for their decisions, why should it be my responsibility to pay their debts? Many, many people feel this way. quikwrit is correct. Go to the source of the loans and restructure them. Leave the US taxpayer out of it.
April– We, too, sought the most affordable options. Our kids happened to excel at tech specialties that were offered by small privates which pegged their tuition to the same level as our state colleges. There was only one modest scholarship offered, but we certainly all worked [husband & I, plus boys during summers, and winter breaks].
But it’s easy to miss how quickly tuitions have continued to spiral over the last 15-20 years, including at more modestly priced colleges. If your kids graduated somewhere around 2005, e.g.– mine were done by 2015: in those 10 years, the average US state college tuition rose 64%! That’s more than triple the inflation for that decade. [Needless to say, our household income didn’t compare; we were happy if it kept even with inflation.] This means that most middle-class people have to take out loans.
The loan program since ‘80s, in my opinion, is the culprit. Children of 17yo are required to sign onto loans which in most cases cannot be paid back by a middle or even upper-middle-class income for decades. Before the ‘80s, you had to go through a process to be declared “independent” [in other words, parents refused to support you starting at age 18] for anything like that to happen.
But the loan program was always just a tool of the overall agenda, cutting the nation’s investment in education. It was in ‘80s that govt slashed its investment in tertiary ed. Reagan did it out of the box with Pell grants et al fed funding in 1980. States, seeing that he paid no political penalty, jumped on the bandwagon and slashed state funds for public universities. Right behind them, all those little privates that peg their tuition to state level followed suit, to stay competitive. Tuitions spiraled up immediately to compensate for lost funding. [My sis’s tuition at one of those modestly-priced little privates rose 250% between 1979-1983.] That was simply not doable– yet mfg jobs were disappearing & all kids exhorted to get a bachelor’s or forget about middle-class QOL—so massively increased demand exacerbating the spiral begun by govt disinvestment. Enter US Dept of Ed’s predatory loan system, spreading the cost of an ed which was fast equaling the price of a house over the same period as a mortgage. Untenable.
“I object to paying for college degrees for people earning far more than I.” This is not about you vs somebody else. It’s a whole-society thing, and the problems are a consequence of govt policy made by our elected representatives.
I like the author’s dismissal of the “I paid, why shouldn’t you?” argument. Spot-on. Basically states, “I got robbed, so you should get robbed too.” With the underlying absurdity that errors should never be corrected. Yet whenever articles on forgiving student loan debt are published, at least 1/3-1/2 of the comments take that position. Perhaps it would help if all such articles spoke in terms of making things better for our children’s and grandchildren’s families.
But that leads me to… what’s the next step? As far as I know, our faulty student-loan program continues to chug along, pumping out just as many un-pay-backable loans as ever…
I don’t think the author is saying “I got robbed, so you should get robbed too.” He says that if we all had that attitude, there would never be a new government program to improve lives.