President Joe Biden recently told a group of lawmakers he is considering cancelling student debt, but a recent report from a nonpartisan budgetary group said doing that would increase inflation even more.
The Committee for a Responsible Federal Budget wrote about the potential for this decision:
Full debt cancellation would cost the federal government roughly $1.6 trillion, while improving household balance sheets by a similar amount. Consistent with our prior analysis, we estimate this would translate to an $80 billion reduction in repayments in the first year, which would in turn increase household consumption by $70 to $95 billion once the effect of higher wealth is considered.
Often, higher consumption leads to higher economic output.1 However, the economy is currently unable to meet existing demand in light of elevated disposable income, strong balance sheets, lingering supply constraints, and other factors. This disconnect helps to explain the why the inflation rate hit a 40-year high in the past year, and why further increasing demand could result in higher prices rather than higher output.
Assuming the economy remains hot and 90 percent of new consumption leads to price increases as opposed to increases in output, we estimate cancellation of all outstanding student debt would boost personal consumption expenditure (PCE) inflation by 37 to 50 basis points (0.37 to 0.5 percentage points) in the year after debt repayments are scheduled to resume. Even if only one-third of new consumption feeds into prices and the Fed responds with further tightening, we estimate student debt cancellation would increase inflation by 10 to 14 basis points.
The group also pointed out that cancelling student debt could hike tuition prices, which have already risen significantly in recent years.
Trish Regan wrote about this issue as well, raising concerns about taxpayers footing the bill.
“Nonetheless, the real question is; how can we invoke more market discipline in the field of education?” she wrote. “We could start by not bankrolling the schools.”