Financial services

How canceling student loans will affect financial services

One of the most debated aspects of the Biden administration’s plan to write off about $400 billion in student loan debt is how it will affect inflation.

Opinions on the matter vary widely. Jason Furman, Chief Economic Advisor to President Barack Obama, tweeted that movement is the equivalent of “[p]Consuming about half a trillion dollars worth of gasoline on the inflationary fire that is already burning is unwise.”

Goldman Sachs, on the other hand, expects the move to have minimal economic impact. In a research paper distributed Thursday, the investment bank predicted the program would boost gross domestic product by 0.1% next year and less in future years, with the inflationary impact following a similar trajectory.

Some officials and commentators have even suggested the White House plan could be deflationary because it calls for an end to the federal student loan repayment moratorium put in place at the start of the pandemic. Borrowers will have to start making monthly payments again from January.

Unlike stimulus payments or even tax credits, there is no transfer of money to borrowers, only debt reduction on their personal balance sheets. This raises the question of whether these individuals feel richer and, if so, whether this induces more demand than the Federal Reserve is. attempt to cancel with higher interest rates.

Derek Tang, co-founder of Washington-based research firm Monetary Policy Analytics, expects demand to be little changed following the debt cancellation. Not only were borrowers able to forgo their loan payments during the moratorium, but many have long written some degree of loan forgiveness into their personal budgets because Biden promised it during the 2020 election campaign.

“There was already a lot of speculation that at some point during the Biden presidency these loans would be canceled,” Tang said. “A lot of people may have already counted on it halfway through, so the resulting impact on their spending habits might not be as big as if it came as a complete surprise.”

Still, Tang said, even a modest increase in demand could warrant further action by policymakers in Washington, especially given that recent rate hikes by the Fed did little to calm a hot labor market.

“If it ends up being a little more inflationary than expected, especially next year, that could impact what the Fed does, as the Fed tries to bring inflation down to 2% and every 10th of a percent account. ,” he said. “Even though it will generate an extra 10th of inflation, it will make the Fed’s job a little harder. The Fed can only bring inflation down by reducing demand, and what that means is is that she’s going to have to push labor down the market a bit more to get what he wants.”

If demand is expected to increase immediately after debt cancellation, it will likely focus on credit-intensive purchases, such as homes and automobiles, which have already seen significant price increases in recent years due to supply and demand imbalances. Yet even skeptics of the policy do not expect it to be a significant driver of headline inflation.

Neal McCluskey, director of the Center for Educational Freedom at the libertarian think tank Cato Institute, said he expects a short-term rise in inflation following the cancellation to be “real but small” and likely difficult to isolate among the various other factors that have caused prices to rise over the past year – including fiscal stimulus programs and supply chain bottlenecks.

Over the long term, McCluskey said the ripple effects of the Biden administration’s action on student debt will have a significant inflationary impact on the world of higher education. He expects prospective students to be more willing to go into debt expecting them to be forgiven and universities, in turn, will raise their prices.

“A lot of people will look at student loans now and say, ‘Well, why shouldn’t I take student loans and take more? Because once there’s a precedent for undoing, they can say ‘OK, why did you forgive them three years ago and not now?’ McCluskey said. “Colleges will see this and raise their prices, not just because they can, but because they have things they think are worth doing and they need the money to do it. That’s one way to get it.” —Kyle Campbell