What Will the Impact Be of Cancelling Student Debt?

Activists call on President Joe Biden to not resume student loan payments in February and to cancel student debt, near The White House on Dec. 15, 2021. Paul Morigi/Getty Images for We, The 45 Million

President Joe Biden is making a final decision on whether to fulfill his campaign pledge to cancel student loans at a politically precarious time.

Biden wants to avoid alienating his young supporters ahead of the November elections, but he faces a tough choice as canceling student debt in the midst of high inflation might spark a backlash, potentially costing him the midterms.

In April, Biden extended the moratorium on student debt payments for the sixth time through August 31. Borrowers have gone more than two years without making a single payment or accruing additional interest on their student loans.

Critics argue that canceling or delaying student loan payments is a bad policy that will merely stoke the flames of inflation and do more harm to the economy. High inflation, they argue, is a hidden tax that disproportionately affects the poor.

Debt forgiveness is akin to the Federal Reserve increasing the money supply, according to E.J. Antoni, a research fellow at the Heritage Foundation.

“One of the key things that people don’t realize about debt is that when you take out a loan, you actually are creating money,” Antoni told The Epoch Times.

“Conversely, when you repay a debt, that is destroying money, so you actually can expand and contract the money supply simply by taking on debt and by repaying debt. When it comes to student loans the principle is literally no different.”

Since the pandemic began in 2020, the Federal Reserve has poured money into the financial system in unprecedented amounts to protect the economy from the effects of the health crisis and lockdowns. Inflation surpassed 8 percent this year, a 40-year high, in part due to the Fed’s policies.

The central bank is now preparing to slam on the brakes by tightening the money supply in order to bring inflation under control. However, forgiving student loans will undermine these efforts, making it more difficult for policymakers to combat inflation.

Making people repay their student loans, on the other hand, would help shrink the money supply and reduce inflation, according to Antoni.

Student loan relief also lowers the incentive to work and affects labor force participation, which retards economic productivity and raises prices, critics say.

According to the Urban Institute, the majority of outstanding student loan debt is carried by those with relatively high earnings.

The Biden administration has recently signaled that student debt relief could be on the way soon. The move could have an impact on nearly 43 million borrowers who owe more than $1.6 trillion in federal student loans.

Can Biden Cancel Student Debt?

Unlike other policies, which require congressional approval, the decision to cancel student loans can be taken by the executive branch, according to Democrats.

They contend that the president has the unilateral authority because the Higher Education Act of 1965 grants the education secretary the authority to “waive, or release” federal student loans.

Some argue that this unilateral authority is ambiguous and that it might be challenged in courts.

“The administration knows that they probably don’t have a constitutional leg to stand on here,” Antoni said.

If they attempt to take this move and the courts overturn it, they may suffer more political damage than benefit, he noted.

While the debate over whether to adopt broad student debt forgiveness continues, the Biden administration has already “approved more than $18.5 billion in loan discharges for more than 750,000 borrowers,” according to the Department of Education.

Mike Lux, a Democratic political strategist, believes providing broader debt forgiveness would greatly increase young people’s motivation to vote.

“We desperately need to motivate young people to vote to have a chance to win this election,” he recently told Washington Post.

However, Biden and Senate Democrats have a major disagreement over the relief amount.

Sen. Elizabeth Warren (D-Mass.) and Senate Majority Leader Chuck Schumer (D-N.Y), have been advocating for a more sweeping package that would forgive up to $50,000 in student debt.

Biden, however, has indicated that he would support relief only up to $10,000 per borrower.

According to economists at the New York Federal Reserve, forgiving $10,000 per borrower would cost the government nearly $321 billion. Under this program, the average borrower would receive loan forgiveness of $8,478. Meanwhile, raising the cap to $50,000 would cost the government $904 billion and result in an average relief of $23,856 per borrower.

Proponents of student loan forgiveness claim that the cancellation of some or all of student debt would minimize the negative consequences it has on the economy such as low homeownership and small business formation.

“They could be good for the economy,” Secretary Janet Yellen said during a Congressional hearing on May 10.

Advocates also argue that student loan forgiveness would help reduce racial income disparities.

However, according to some economists including Stephen Moore forgiving student loans is a bailout funded by taxpayers.

“It’s not forgiveness. … It’s shifting the burden from the people who borrowed the money to you and I and all the taxpayers,” Moore told NTD Business on April 28. He added that the move will make the record-high inflation even worse.

The student loan moratorium has cost taxpayers more than $130 billion in interest payments since the pandemic began, according to Antoni.

To avoid criticism, Biden is considering imposing income limitations on student loan forgiveness to keep higher-income borrowers out.

This strategy, however, is another hurdle for Biden to overcome. The proposal has already angered progressives as its implementation before the November elections might be a nightmare, according to a Politico article.

Education Department officials have privately voiced concerns about the difficulty of attaching an income requirement to the cancellation of student loans simply because they don’t have the income data.

That’s why the concept of student debt elimination will necessitate significantly greater information sharing with the government than is currently necessary, according to John Gizzi, chief political columnist of Newsmax.

“To qualify for cancellation or relief, one will be forced to give the Department of Education permission to acquire personal information on him or her from the IRS,” Gizzi told The Epoch Times.

Because of these issues, some speculate that the Biden administration may seek to extend the moratorium on student loan payments until after the November elections. After all, they argue, extending is practically the same as forgiveness.