Student Debt & Inflaction

Actually, Canceling Student Debt Will Cut Inflation - The Atlantic 8/25/22, 10:40 PM
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Actually, Canceling Student Debt

Will Cut Inflation
Biden’s targeted loan forgiveness will help, not harm, the economy.
By Joseph E. Stiglitz
Nina Berman / Redux
AUGUST 25, 2022, 7 AM ET

https://www.theatlantic.com/ideas/archive/2022/08/biden-student-debt-cancelation-stiglitz/671228/ Page 1 of 10
AUGUST 25, 2022, 7 AM ET SHARE
About the author: Joseph E. Stiglitz, a professor at Columbia University and the chief
economist at the Roosevelt Institute, is the author, most recently, of People, Power, and
Profits: Progressive Capitalism for an Age of Discontent.
We want to fight inflation and we want to keep the labor market strong. One
of the most important ways to achieve both goals is to forgive a portion of
student-loan debt. And yesterday, President Joe Biden announced that he was
doing just that—canceling up to $10,000 in student debt for those making
less than $125,000 and designating an additional $10,000 in loan forgiveness
for Pell Grant recipients. Yet critics are attacking the measure, even at its
modest level and with its targeted exclusions and benefits, as inflationary and
unfair.
Whatever your view of student-debt cancellation, the inflation argument is a

red herring and should not influence policy. Taking that logic to the extreme,
canceling food stamps would do far more to reduce inflation—but that would
be cruel and inhumane, and fortunately, no one has suggested doing so. A
closer look at the student-debt-cancellation program suggests that the new
student-loan policy may even reduce inflation; at most, its inflationary impact
will be minuscule, and the long-term benefits to the economy are likely to be
significant.
A DV E RT I S E M E N T
The contention that debt cancellation will be inflationary contains a series of

flaws. To start with, the value of the reduced debt repayments is so small that
the cancellation’s impact will be negligible.
Although the broad estimates of the total amount of canceled debt can be big
—some reach hundreds of billions of dollars—these figures derive only from
budgeting practices for how credit programs like student loans are recorded.
The government and budget analysts calculate a number that is known as “the
present discounted value of foregone payments.” This corresponds to a current
estimated value not of the lost payments this year, but of those in all future
years. In other words, this calculation treats all of the losses from debt
cancellation as though they occurred right now in a single year (adjusted for
inflation)—a far cry from the reality. Such an accounting procedure can be an
appropriate practice for thinking about the government’s long-run balance
sheet, but it is a very poor guide for understanding what actually happens to
people’s spending.
Jerusalem Demsas: Who really benefits from student-loan forgiveness?
The inflation hawks compound this error by assuming that the indebted
students will take their forgiven debt and go on a spending spree, a splurge of
such magnitude that they would have to somehow find someone in the
private sector willing to lend them the same amount at low interest rates to
finance their extravagance. Economic theory says that these individuals will, at
most, consider this an increase in their net wealth—I say “at most” because in
many cases, these loans would never have been repaid at all. And economic
theory also says that an increase in wealth is spent gradually over the course of
a person’s life, not all in one year.
The actual amount of annual debt payments that would be reduced now,
during this present inflationary episode, will probably run to tens of billions
of dollars, not hundreds of billions. The lower number is likely because, again,
many of those whose debt is being forgiven would not be making the
payments anyway; many people with these debts simply don’t have the
economic means to repay them.
The costs of cancellation are also far less than the value to be realized when
student-debt payments resume after having been halted during the pandemic.
Right now, because of the forbearance put into place in 2020, no payments
are being made on government-owned student loans. This policy was essential
to stabilize the economy during the pandemic. As part of a larger program of
cancellation, the Biden administration would end forbearance; the resumption
of payments in January is estimated to be worth more than $30 billion
annually.
These numbers are modest relative to the size of our RECOMMENDED READIN
economy. Still, their net effect will be to reduce
inflation. Unborn Baby Shark Film
Swimming Around Insid
Mother
Some of the critics demand that payments should
ED YONG
simply resume without any cancellation. That would
plunge a large number of student debtors back into
The Lie We Tell Ourselv
immediate financial distress and further loan
About Going to Bed Ear
delinquency. According to analysis from the Federal ARTHUR C. BROOKS
Reserve Bank of New York, just before the pandemic,
11 percent of student debt was either in default or more
than 90 days in arrears. Because of pandemic Running for His Life
forbearance and other emergency measures, that default DEVON HEINEN
rate went to zero for most student debt—though

researchers found that student loans excluded from
forbearance continued to default, not surprisingly, at a high rate. According to

the New York Fed’s survey, once payments resume, we will quickly return to
that world: A large segment of people will be unable to service their payments
and, in the Fed’s words, “lower-income, less educated, non-white, female and
middle-aged borrowers will struggle more in making minimum payments and
in remaining current.”
Ben Sasse: How to really fix higher ed
This level of distress is bad for the economy, both in the short run, as we strive
for a robust recovery, and in the long run. Having little or no access to credit
means that starting a family or a small business, moving, or otherwise
building up lives is much harder for so many young people. A growing body
of evidence backs up the common-sense conclusion that student-loan debt is
linked to people delaying significant life events such as getting married and
having children.
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This has society-wide consequences. People’s well-being is obviously affected,

and so is the economy. The Federal Reserve Bank of Philadelphia found that
student debt is associated with weak new-business formation, in particular of
new businesses with one to four employees. Given that the rapid increase in
the number of small businesses—especially ones founded by Black and brown
entrepreneurs—that we saw in 2021 may already be slowing down, we should

be looking for ways to support that growth, not undercut it.
Studies of those student debtors who have had the good fortune to get their
debt canceled by courts have found that the freedom from loan payments
allows people to borrow anew and move around the country to take better
jobs. Because continuing to build up our labor force and help people find jobs
better matched to their skills is so important, a comprehensive student-loan
debt-cancellation program will have a valuable economic upside.
Until recently, the U.S. led the world with high-quality and widely accessible
college education. American prosperity and freedom have been tied to
innovations such as the land-grant university, the GI Bill, and our world-class
public universities. But because that education now comes at an ever-
increasing price accompanied by an ever-increasing student debt for so many,
our students fall behind before they even start their first jobs. The entire
system of supporting and financing higher education needs an overhaul, but
in the interim, we need to understand and address the immediate problem—
and the Biden administration yesterday took a crucial first step by reducing
the debt burden on many struggling American families.
Joseph E. Stiglitz, a professor at Columbia University and the chief economist at the
Roosevelt Institute, is the author, most recently, of People, Power, and Profits:
Progressive Capitalism for an Age of Discontent.
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Actually, Canceling Student Debt Will Cut Inflation - The Atlantic 8/25/22, 10:40 PM

Popular Latest Newsletters Sign In Subscribe

Actually, Canceling Student Debt

Nina Berman / Redux

AUGUST 25, 2022, 7 AM ET

AUGUST 25, 2022, 7 AM ET SHARE

Whatever your view of student-debt cancellation, the inflation argument is a

The contention that debt cancellation will be inflationary contains a series of

Jerusalem Demsas: Who really benefits from student-loan forgiveness?

rate went to zero for most student debt—though

forbearance continued to default, not surprisingly, at a high rate. According to

Ben Sasse: How to really fix higher ed

GET THE NEWS, WITHOUT THE NOISE.

Enter your email Sign Up

This has society-wide consequences. People’s well-being is obviously affected,

entrepreneurs—that we saw in 2021 may already be slowing down, we should

1 There Is No National Teacher

2 A Shortcut for Feeling Just a Little

3 The Trait That ‘Super Friends’

4 Actually, Canceling Student Debt

5 Biden’s Student-Loan Gamble

6 That’s It. You’re Dead to Me.

7 The Spookiest Sound in

8 Gavin Newsom, the Ron DeSantis

10 A Risky Monkeypox Vaccine Is

FROM THE ATLANTIC

Discover subscriber newsletters

ABOUT CONTACT PODCASTS SUBSCRIPTION FOLLOW

Our History Help Center The Experiment Purchase

Careers Contact Us Floodlines Give a Gift

Atlantic Brand Partners How to Build a Happy Life Manage Subscription

Press The Review Download iOS App

Download Android App

You might also like

Student Debt & Inflaction

Student Debt & Inflaction

Student Debt & Inflaction