The student loan scheme introduced by President Joe Biden is a potential pendulum for debt-stricken Americans.
But the impact on the economy may be too small to notice.
On Wednesday, Biden announced that his administration will give $10,000 deductions to borrowers earning less than $125,000 a year. In addition, low-income borrowers who had college Pell grants will be exempted up to $20,000.
This debt plan will give tens of millions of borrowers a breath of fresh air during a difficult time when the cost of living is rising.
On a critical note, a student debt relief is expected with a plan to lift the federal student debt freeze starting January 2023, meaning many Americans who haven’t paid a dollar on their student loans since March 2020 will be obliged to pay up.
While there are concerns that Biden’s debt relief plan will add to already bad inflation, economists say the combined impact on the economy as a whole will be small.
“The end of the moratorium will weigh on growth and inflation, while the debt forgiveness will support growth and inflation,” said Mark Zandi, chief economist at Moody’s Analytics, in an interview with CNN.
“The net of these cross-currents is largely a wash.”
Moody’s projects that the combined effect will reduce real GDP by 0.05 percentage points, unemployment by 0.02 percentage points and inflation by 0.03 percentage points in 2022. In short, it’s an impact almost imperceptible – a very small one.
“We’re not talking about raising or lowering inflation by a percentage point or even a half a percentage point. We’re talking about a really small impact,” Center for Economic and Policy Research’s co-founder, Dean Baker, said in a phone interview with CNN.
“But for individuals, this makes a big difference. It wipes out more than half the debt for more than half the borrowers. That’s a big deal.”
Debt Plan: Borrowers are Impacted But Not the General Economy:
The usual undergraduate student with loans finished schools with almost $25,000 in debt, said an analysis from the Department of Education referenced by the White House.
Approximately 43 million borrowers will be given debt forgiveness from Biden’s student debt plan, which includes slashing the complete remaining balance for around 20 million borrowers, per the White House.
The inflationary effect would have been bigger if Biden did not implement an income threshold on the debt forgiveness or if he kept outcries from a few progressives to eliminate $50,000 in student loans.
Baker believed Biden’s plan was a “good compromise” that prevented the approach to extremes.
“It’s helping people out, but not giving away the store,” he stated.
A few groups, including the NAACP, debate that Biden’s plan isn’t enough considering the amount of student debt in the US.
“Canceling just $10,000 of debt is like pouring a bucket of ice water on a forest fire,” NAACP leaders said in a note featured in a CNN Business opinion piece.
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Photo: USA Today