On August 24, Joe Biden kept a campaign promise to reduce the burden of student loan repayment. His executive order "forgave" $10,000 of outstanding student loan debt; $20,000 for those who had Pell grants during college (grants reserved for low-income students.)  This executive order would cost $300 Billion and provide relief to the 45 million graduates with loans totaling $1.75 Trillion. 

         The immediate response to this executive order came from all directions: some claimed that it was unfair to those who pay taxes but will not themselves benefit from the program because they do not have student loans. Others found unfairness in the small size of the relief. Still, others complained that it would be adding to the high rates of inflation that the country and the world are now suffering.

Program "Fairness"

         Of course, any government program considered in isolation will benefit some parties, and others not.  Because they are designed to address specific problems, individual programs cannot be expected to be "fair”. The essence of the counter-argument is to look at the broad range of government programs to see if there is a balance in public benefits.

         A primary example of this is the pandemic-fighting "Paycheck Protection Program" or PPP, that benefited businesses during the downturn in the economy due to the dramatic shift of consumer spending from services – – movies, restaurant meals, air travel – – to durable goods – – home office equipment, home renovations.  During those massive shifts in demand, the federal government sent checks to individuals and entrepreneurs to keep them in business and their workers paid. The fairness issue arose in that program as well; the White House gleefully pointed out that Marjorie Taylor Greene (R-GA14) received PPP loan forgiveness totaling $183,504.

         The inflation argument is trickier.  The country and the world are already in an inflationary phase, particularly seen in the prices for gasoline and food.   For the student loan program to add to this existing inflation, the executive order would have to add a substantial amount to total national spending in a given year.  Does the $300 Billion cost qualify? 

         Nobel Prize-winning economist Joseph E. Stiglitz responded to this question in his August 25 article for The Atlantic magazine, entitled:  "Actually, Canceling Student Debt Will Cut Inflation."

         Stiglitz contends that Biden’s targeted loan forgiveness will help, not harm, the economy. His key point is that the $300 Billion cost is NOT an annualized dollar figure.  Instead, this large sum is the present value lump sum of the current loan obligations over the lifetime of the obligations. Yes, if all that money were to be added to the national spending in just one year, it would have upward pressure on prices. But that is not what is happening.

          The annualized cost of the forgiven loan repayment is only $24 Billion, not $300 Billion.  $24 Billion is only 0.1% of GDP, too small to significantly affect total national spending. 

         But, there's more:  due to the pandemic, student loan payments were suspended.  These payments, amounting to $30 Billion per year, will resume in January 2023.  Remember:  debt forgiveness can only be inflationary if the net effect is a large INCREASE in national spending. Stiglitz shows that the net result is a negative $6 billion a year, a DECREASE in discretionary spending.

Expect This Topic During the Fall Election Campaigns. 

         We can expect that during the fall campaign this executive order will be brought up as an example of the usual list of slogans: wasteful government spending, socialism, perhaps even Marxism and communism, that will worsen inflation and cause a recession.  The arithmetic shows otherwise: the debt forgiveness program is too small to affect inflation and, in any case, is offset by the loan repayments that resume in January 2023 after a two-year pandemic-induced pause.

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.