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The Biden administration kept federal borrowers on their toes and waited until the eleventh hour to make a student loan forgiveness announcement. Their plan to forgive $10,000 in student loan debt has been met with positivity and apprehension. Some lawmakers claim that a relief measure of this scale would contribute to record-breaking inflation as the economy reels from multiple interest rate hikes.
Would $10,000 in federal loan forgiveness per borrower be inflationary? Some experts say no, at least not in the foreseeable future.
Inflation, potential interest rate hikes are primary concerns
President Biden’s student loan forgiveness proposal has been a politically divided subject across both aisles. On one hand, progressive Democrats have been calling for immediate forgiveness of $50,000 per student, while Republicans have long argued that the President doesn’t have the authority nor the means to enact such a measure.
As the U.S. economy reaches decade-high levels of inflation, the partisan divide seems to run deeper. Many Republicans are citing concerns about the potential inflationary impact that broad forgiveness would have on the already strapped economy.
However, Mark Hamrick, Bankrate senior economic analyst and Washington bureau chief, isn’t convinced that a potential forgiveness measure would trigger a major reaction from the Federal Reserve. “I think that’s unlikely,” he said when asked if the Fed may be inclined to react with aggressive monetary policy. “This is a massive economy we have, and it takes a lot to move the needle with respect to things like consumer spending and business spending.”
$10,000 of forgiveness isn’t enough to trigger economic shift
President Biden has made it clear – before and after his announcement – that he’s against forgiving any amount higher than $10,000 per borrower. In this case, it’s more important to consider the impact that forgiveness would have on spending rather than focusing on the amount of debt forgiven, says student loans expert, Mark Kantrowitz.
He breaks down the economic details per borrower, explaining that $10,000 in forgiveness is equivalent to about $100 a month per borrower. The primary concern is that borrowers will use this newfound money to buy high-ticket items, like cars or homes, which could then contribute to rising inflation.
Kantrowitz argues that many borrowers most likely won’t spend all of the amount canceled, but rather are more likely to use it to pay down other debt or bolster their savings; however, “the impact on the economy will be small either way,” he added.
Betsy Mayotte, President of The Institute of Student Loan Advisors echoes Kantrowitz’s statements, saying that roughly $100 of extra cash a month is unlikely to allow most borrowers to make those large purchases, especially if they’re already struggling to make their monthly payments.
“If they [the Biden administration] were to forgive all of it [student loan debt], that would be a different story, “she says. “But I think everyone can agree that’s not on the table.”
Debt relief more likely to impact borrowers over the “intermediate long term”
Student debt cancellation, regardless of the amount, has the potential to increase wealth for borrowers across the board as it frees up expenses that would have gone toward debt. While lawmakers have expressed hesitation around forgiveness due to this, an increase in wealth doesn’t necessarily lead to an immediate increase in spending.
A 2022 Bankrate survey found that 59 percent of U.S. adults with current or previous student debt have delayed significant financial milestones, like buying a home or starting a family, due to their debt. Hamrick argues that forgiving student debt won’t allow these borrowers to make those financial milestones immediately, but would rather bring them closer.
“It doesn’t mean that they would be ready to buy a home in six months,” says Hamrick when referring to who would benefit the most from cancellation.”But it means that the journey could occur more quickly than it would otherwise by at least a margin.”
How borrowers can best prepare if forgiveness doesn’t happen
The payment pause is extended until 60 days after the Department reaches an agreement with the Supreme Court or 60 days after June 30, 2023 – whichever comes first. But with student loan policy still up in the air, it’s important for borrowers to prepare for repayment and not rely on potential legislation to take care of their balance.
Mayotte urges borrowers to get back into the habit of making the monthly payments by paying down their loans free of interest or depositing the money into a high-yield savings or interest-bearing account.
“People underestimate how powerful just the habit of making the payment is,” Mayotte says. Borrowers can earn interest and make a lump sum payment towards the end of the payment pause if it does get extended.
Possible cancellation to come with restrictions
While Biden’s debt relief program is currently on hold due to multiple lawsuits, the administration has placed additional eligibility requirements on forgiveness. In fact, prior to the program’s announcement, Mayotte claimed that she would be surprised if forgiveness didn’t come with limitations. The administration has limited eligibility on annual income; to qualify for up to $10,000, individual borrowers must make under $125,000 and those filing jointly must make under $250,000. Those who have ever earned a Pell Grant and meet the income requirements are eligible for up to $20,000 in forgiveness.
In light of the uncertainty surrounding forgiveness, it’s important now more than ever that borrowers are aware of all of their federal repayment options and benefits. To best prepare, borrowers can look at their entire loan balance and conduct a financial analysis. If it seems like making the monthly payments may be tight, there are alternative repayment plans and hardship relief options offered by the Education Department.