The Biden administration’s student loan repayment moratorium, and potential plans to cancel student loan debt, are inflationary.
With the moratorium set to expire at the end of August, the President is now deciding whether to extend the moratorium for a fifth time.
The student loan moratorium began in March 2020. Despite the fact that the U.S. is well beyond the height of the pandemic, this disastrous policy has been extended repeatedly, costing taxpayers nearly $135 billion. Each month the pause is in place, it costs taxpayers an additional $5 billion.
The Biden administration may also soon decide to cancel student loan debt for borrowers. This policy would forgive $10,000 in student loan debt for each borrower, costing a whopping $373 billion. President Biden insists this could be done without any congressional approval.
As is evident, federal spending is already out of control. In 2020, the U.S. government spent over $6 trillion, while in 2021, the U.S. spent $6.82 trillion, or 30% of the economy. The U.S. now holds about $243,000 of debt per taxpayer and the Congressional Budget Office projects that U.S. interest costs will triple within the next decade, accounting for 12% of the entire federal budget. In 2021, U.S. interest payments on its debt alone cost roughly $2,600 per household.
Democrats maintain that these massive costs don’t matter because giving loan borrowers more money to spend will stimulate the economy.
In reality, this plan would cost the government far more than it would provide stimulus. The Committee for a Responsible Federal Budget conducted an analysis which found that for every dollar the government spent on student loan forgiveness, as little as 3 cents and at most 27 cents of economic activity would be produced.
Further, demand is not the issue at hand. Concluding that Americans simply need more handouts at a time of high inflation is juvenile and ill-considered. This approach deeply misunderstands how the economy works. In fact, it’s these policies that drive inflation.
Out-of-control spending by the government creates the multiplier effect, which suggests that government spending leads to an increase in private spending by both businesses and individuals. This is especially true when the government is giving direct handouts, as they have with the loan repayment moratorium and as they would through debt cancellation.
The multiplier effect then creates demand-pull inflation: the federal government has flooded the economy with so much money that demand is growing too fast for production to keep up.
This is why it is so frustrating when Democrats insist on handouts to mitigate inflation. The policies they’re proposing are inflationary.
The Biden administration does make a compelling point when it argues that, if required to pay back their loans, borrowers would be financially strained. While I’m sympathetic to this argument, it does not justify the macro effects of the policy nor does it hold up.
It cannot be ignored that federal student loan borrowers make up just 17% of the adult population and are disproportionately wealthier than the average American. The top 20% of households currently hold $3 in student loan debt for every $1 of debt held by the bottom 20% of earners. About 75% of student loan repayments come from the top 40% of earners.
It’s impossible to justify handouts to a few well-off Americans at the expense of low-income Americans’ ability to put food on the table and pay for gas.
Unfortunately, the Biden administration seems willing to sacrifice Americans’ financial security in order to guarantee their base—wealthy, liberal elites—this handout.