Student debt forgiveness will make inflation worse

Student debt forgiveness will make inflation worse

Famed economist Larry Summers warned Monday that the Biden administration could make the current inflation crisis worse if it goes too far with student debt forgiveness initiatives.

Summers, a former top economic official in the Clinton and Obama administrations, called for caution as reports swirl that President Biden is close to making a decision on whether to extend the ongoing payment moratorium for student loans – and potentially wipe some debt clean.

“I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief or micro economically by encouraging college tuition increases,” Summers said in a series of tweets on Monday.

“Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college,” Summers added.

The pause on student loan payments, first imposed in the early days of the COVID-19 pandemic, is currently slated to end on Aug. 31. On Sunday, US Education Secretary Miguel Cardona told NBC that Biden will decide how to proceed within the “next week or so.”

Larry Summers
Larry Summers warned that student loan forgiveness would raise demand within the economy.
Bloomberg via Getty Images

“Student loan debt relief is spending that raises demand and increases inflation,” Summers added. “It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.”

Biden has faced intense pressure from progressives to cancel some or all outstanding student debt – but most Americans agree with Summers’ assertion.

President Biden
President Biden is under pressure from progressives to cancel student debt.

A CNBC survey found that 59% of respondents were concerned that student loan forgiveness would make the current inflation problem even worse, according to results released on Monday.

The survey found that 30% of Americans do not support any student loan forgiveness measures, while 34% said relief should be based on financial need and 32% backed debt forgiveness for all.

Student loan protestors
A survey showed most Americans also fear debt forgiveness will fuel inflation.
AFP via Getty Images

Biden is considering how to act even as economic policymakers at the Federal Reserve scramble to put the brakes on the US economy through interest rate hikes. Inflation hovered at 8.5% in July – a slight downtick compared to the previous month but still near four-decade highs.

Summers has been a frequent critic of both the Biden administration and the Fed’s response to inflation. The ex-Treasury secretary also called on the Fed to be more clear about the likelihood that its policy tightening will result in job losses.

Source link