Canceling Student Debt Would Increase Wealth, Not Inflation

CRFB’s deficit analysis isn’t an apples-to-apples comparison.

CRFB treats their $230 billion cost estimate of canceling $10,000 in student debt as if it is incurred over the next 10 years in order to compare that against the IRA’s deficit reduction in that same time period. They treat both as if they are on the same cash accounting standard. But this is not the case; per budgeting rules associated with credit programs, student loan cancellation is treated as if the foregone principal and interest payments over the entire lifetime of the loan all occur immediately. 

So while the actual reduction in government revenues from cancellation would be small in each year and spread over decades, something like $13 billion per year, it is budgeted as if all those years are all happening immediately. This means that student loan payments that would have been collected past the first decade are instead treated as lost revenue immediately within the first year. 

To truly compare the two, you would need to look at the deficit reduction of the IRA over at least two decades. CRFB has found that the IRA reduces the deficit by $1.9 trillion over two decades ($1.1 trillion with ACA subsidies extended), largely driven by prescription drug savings in the out years. This is far larger than the cost of any student loan cancellation.

CRFB’s own analysis shows that any inflation from debt cancellation is small and more than offset by payments restarting.

There’s reason to be skeptical about CRFB’s 15 basis point estimate for canceling $10,000 in student debt. They do not provide details on how they estimated this, and it is far above their previous estimates. In February 2022, CRFB argued that “cancellation of all outstanding student debt would boost . . . inflation by 37 to 50 basis points.” Given that canceling all student debt is more than six times the cost of canceling $10,000, it’s hard to see how these two numbers square. Moreover, they do that by assuming “90 percent of new consumption leads to price increases as opposed to increases in output,” which would mean we’re on a nearly vertical Phillips Curve, an unlikely description of our macroeconomic situation. Overall, student debt cancellation provides little economic stimulus, a point CRFB has made multiple times throughout the years.

That said, even their own numbers show that canceling some student debt and restarting payments in the near future would reduce inflation versus restarting payments. They argue that restarting payments would reduce inflation 20 basis points a year each year, versus a 15 basis point increase to canceling $10,000 in student debt. Thus a deal that canceled student debt and restarted payments would reduce inflation versus the status quo.

Before any payments restart, it’s critical that we update repayment programs to address the long-standing failures of higher education finance. The student loan payment forbearance was a smart and important policy that allowed borrowers to retain their current income and better address the dislocations of the pandemic that exacerbated the financial stress of debt payments. As the Federal Reserve Bank of New York found, “lower-income, less educated, non-white, female and middle-aged borrowers will struggle more in making minimum payments and in remaining current” when forbearance ends. These are the groups that would benefit the most from cancellation.

An increase in wealth is unlikely to drive spending, since this recovery is mostly about people spending out of their incomes while increasing savings.

Student debt cancellation will increase people’s wealth. However, there’s very little evidence that increases in wealth have led to higher spending so far in this recovery. This is a period in which people are building up strong economic buffers. According to the Federal Reserve’s Distributional Financial Accounts, households have continued to build up their wealth, especially at the bottom of the income distribution. Moreover, as the Fed’s annual Survey of Household Economic Decisionmaking found, 2021 saw an increase in households that had a three-month emergency fund across the income distribution. These are positive developments that will dull any new spending impact from debt cancellation.

There has been a significant amount of debate about the question of “excess savings” and spending. As the financial analyst Matthew Klein has shown, excluding capital incomes and taxes, the spending rate is right in line with incomes. And as the economist Dean Baker notes, the recent decline in the savings rate is driven by increases in capital gains taxes being paid, which, because capital gains are excluded from incomes, mechanically reduces savings.

Research about the pandemic suggests that reductions in debt among low-income households further support savings without increasing current spending, as debt reduction enables borrowers to service other debts. 

Importantly, Black borrowers will disproportionately benefit from the wealth increase that student debt cancellation delivers because Black students have a greater likelihood of taking on debt to attend college and borrow more to cover college expenses when compared to white students. The risk of further deepening the intergenerational racial wealth inequalities that Black students already face when entering college calls for the cancellation of student debt.

It is imperative that policymakers work on reducing inflation, and we’ve proposed a whole-of-government approach to doing so. But battling inflation should not preclude the Biden administration from addressing the other economic pressures and inequities Americans are facing. 

Our work has shown that student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity—all without increasing inflation. The IRA—like the American Rescue Plan and the Bipartisan Infrastructure Law—is evidence that we can tackle our largest problems and create a more equitable and prosperous future in the process.