Monthly return to borrowers will be dwarfed by increased inflation cost.
Defenders of the federal student loan program from both sides of the aisle are clearly getting very, very worried. They started the year by arguing that student loan cancellation would benefit the wealthy. Now, however, they are seizing on the specter of inflation, and claim that cancelling student loans would exacerbate inflation.
One example (of dozens): In a two-page lobbying memo intended to convince the President to end the federal student loan repayment moratorium from SoFi and other private lending interests, for example, “Inflation” was mentioned no less than 10 times.
Both arguments are asinine. The claim that cancelling student loans will benefit the wealthy is easily disproven in this article, and won’t be repeated here. The argument that cancelling student loans will only accelerate the current inflationary trend, however, has yet to be addressed, but there are at least three different arguments that demonstrate clearly that the claim is ridiculous on it’s face.
First: The average student loan borrower has a monthly payment of roughly $400/month. According to the Bureau of Labor Statistics✎ EditSign✎ EditSign, the average monthly expense for an average household (2.5 people) in the U.S. was $5,875. Annual inflation, currently, is 8.5%. This leads to an increase in monthly expenses for the average household of about $500/month. The monthly increase in these borrowers income that would result from student loan cancellation would not even cover the increase in their monthly expenses due to inflation. Therefore, even total student loan cancellation could not contribute to additional consumption (demand), and thus could not contribute to inflation.
Second: Almost no one has been paying on their federal student loans for the past 2.5 years. If all federal loans were to be cancelled today, borrowers would not suddenly have more money to spend every month, their spending ability would be unchanged from what it has been during the past 2.5 years. One might argue that increased borrowing capacity would provide them with increased purchasing power, but any meaningful loan underwriting would take into account the decrease in their spending ability due to inflation as explained above, thus they would not be able to borrow more. Given this, there is literally no mechanism by which these borrowers could exacerbate inflation due to loan cancellation.
Third: It is widely accepted that the current inflation is not due to an increase in demand. Rather, the inflation we are seeing is due largely to supply-chain issues stemming from- fuel shortages, fertilizer shortages, and other supply-chain issues. A casual glance at the empty shelves in many retail outlets, gas prices, and food prices demonstrate this clearly. Cancelling student loans would obviously have no impact on these external factors.
So, all of the many, and repeated claims that cancelling student loans will cause inflation are, frankly, rubbish.
The large majority of student loan borrowers are in the bottom 80% of earners, and they are- as everyone in the middle and lower income levels is- feeling the brunt of this inflation most of all. According to the Department of Education’s former Chief Operating Officer, Wayne Johnson, 85% of these borrowers were underwater on their loans (ie unable to pay, or paying but with increasing loan balances) before the pandemic- so these people were struggling well before Covid, and the inflation we are seeing now only exacerbates their plight- even with total student loan cancellation.
The federal student loan system is, by all rational metrics, catastrophically failed. At a minimum, standard bankruptcy protections should be returned to these loans immediately. Ultimately, however, the President will have to cancel the loans broadly, deeply, and perhaps totally. It would be far better for the country to act boldly now, rather than string this problem out through yet another election.
We can do better than this.
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