Will Student Debt Forgiveness Help or Hurt?
According to federal data more than 43 million Americans have federal student debt with about a third owing < $10k and more than half owe < $20k.
President Biden announced 3 policies related to student loans. First, he extended the no monthly payment required and the 0% rate until December 31st. Second, borrowers will be able to get their payments reduced in the future to as low as 5% of their monthly income. But, this could mean they never pay off their student loans and their remaining debt will be paid by taxpayers. Third, he announced he will forgive $10k to $20k of student loan debt.
Logan Mohtashami, Lead Analyst at HousingWire said, “While the loan relief amount is likely to have a negligible impact on the home buying process, it can help future renters with cash flow.” Thus, it should be easier to save for a down payment on a home.
What we don’t know yet is how will we pay for this? It’s estimated this will cost at least $300 billion and possibly as much as $1 trillion over 10 years. But, to provide immediate debt relief of $10k to $20k almost certainly will require us to print money by issuing new Treasury debt and unfortunately this new money supply will cause inflation to rise. The Federal Reserve has a lot of work ahead for themselves fighting back against some of our fiscal policies.
On that note, last Saturday at the Jackson Hole Symposium that Powell spoke at, Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed argued that if monetary tightening by the Fed was not supported by appropriate fiscal adjustments, then the “deterioration of fiscal imbalances will lead to even higher inflationary pressure.” Their study concluded that U.S. fiscal policy was one of the factors behind the recent surge in U.S. inflation.