How Biden is handling student loan payments amid inflation

President Biden, criticized for rapid inflation and seeking ways to help cushion rising costs for households, extended a moratorium on student debt repayment until August. Although politically popular with Mr Biden’s party, the move has drawn criticism for adding a small dose of oomph to the very inflation the government is trying to tame.

America’s strong economic recovery from the deepest shutdowns of the pandemic era has left consumers with spending power and fueled rapid price increases. These rising costs are making voters unhappy and hurting the Democrats’ chances of retaining control of Congress in November.

The extension of the moratorium has emerged as an example of a broader problem facing the administration: Policies that help households stretch their budgets might appease voters, but they might also add some fuel to the fire. inflationary at an inopportune time. And perhaps more importantly, analysts say, they risk sending a signal that the administration is not focused on fighting price increases despite the president’s promise to help cut costs.

Inflation is rising at the fastest pace in 40 years and more than three times the Federal Reserve’s 2% target, as rapid purchases come up against tight supply chains, labor shortages labor and a limited supply of housing to drive up prices.

The administration’s decision to extend the student loan moratorium until August 31 will keep the money in the hands of millions of consumers who can spend it, helping to sustain demand. While the effect on growth and inflation will most likely be very small – Goldman Sachs estimates it’s probably adding around $5 billion a month to the economy – some researchers say it sends the wrong message and arrives at the wrong time. The economy is booming, jobs are plentiful, and conditions seem ideal for borrowers to resume repayment.

“Four months alone won’t get you dramatic inflation,” said Marc Goldwein of the Committee for a Responsible Federal Budget, noting that a full-year moratorium would only add about 0.2 percentage points to inflation, according to his estimate. (The White House estimates an even smaller number.) “But that’s four months, on top of the previous four months.”

Additional aid for student borrowers could, at the margin, run counter to recent Fed policy changes, which aim to reduce household purchasing power and dampen demand.

In March, the Fed raised interest rates for the first time since 2018, and it is expected to make an even bigger hike in May as it tries to rein in spending and give money chains some breathing room. supply. It tries to weaken the economy just enough to put inflation and the economy on a sustainable path, without plunging it into a recession. If history is any guide, getting there will be a challenge.

A chorus of economists took to Twitter to express their frustration with Tuesday’s decision when news of the administration’s plans broke.

“Wherever one stands on student debt relief, this approach is regressive, uncertainty-creating, untargeted and inappropriate at a time when the economy is overheating,” writes Lawrence H. Summers, a former Democratic Treasury secretary and economist at Harvard who has been warning of inflation risks for months. Douglas Holtz-Eakin, a former director of the Congressional Budget Office who now heads the American Action Forum, which describes itself as a center-right political institute, sums it up like this: “aaaaaaarrrrrrRRRRGGGGGGGHHHHHHH!!!!!!!!!!!!!”

Again supporters of even stronger action argued that the moratorium was not enough – and that the affected student loans should be canceled altogether. Senators Chuck Schumer of New York, the Democratic leader, and Elizabeth Warren of Massachusetts are among lawmakers who have repeatedly pressed Mr. Biden to erase up to $50,000 per borrower through executive action.

This sharp divide underscores the tightrope the administration is walking on as the Nov. 8 election approaches, with Democratic control of the House and Senate in balance.

“They’re buying political time,” Sarah A. Binder, a political scientist at George Washington University, said in an email. “Kicking the road – with another extension, surely, before the election this fall – seems like the politically optimal move.

The administration is taking a calculated risk on inflation: Student loan deferrals are unlikely to be a major factor pushing inflation higher this year, even if they add some extra juice to the request at the margin. At the same time, pursuing politics avoids a political tussle that could tarnish the administration and the reputation of the Democratic Party ahead of the November vote.

White House officials stressed Wednesday that the small amount of money the deferrals add to the economy each month would have only a marginal impact on inflation. But they could help vulnerable households, including those who have not completed their education and have poorer job prospects.

“The impact of the extended pause on inflation is extremely negligible – you would have to go to three decimal places to find it, and if you did, it would be 0.001,” said White House staffer Jared Bernstein. . Council of Economic Advisers.

The Federal Reserve Bank of New York suggested in recent research that some borrowers could struggle under the weight of payments and show a “significant increase” in delinquencies once payments resume. Mr. Biden referenced this Fed data during his announcement. the The Ministry of Education suggested that borrowers would benefit from a “fresh start” that would automatically eliminate delinquencies and defaults and allow them to begin repayment, once it resumes, in good standing.

“We are still recovering from the pandemic and the unprecedented economic disruption it has caused,” Biden said.

The move could also ease the pain of an inflationary moment for some households. Voters are deeply unhappy as inflation eats into paychecks and wipes out wage gains for many workers. A recent Gallup poll showed worries about inflation have reached their highest level since the 1980s, and while lower among Democrats than Republicans, they are rising across partisan lines.

Some proponents of extending the moratorium have cited inflation as part of their reasoning.

“This is an important step to ensure spending by working families does not increase as we work to combat inflation and corporate greed,” said Rep. Pramila Jayapal, Democrat of Washington. , wrote on Twitter.

But the reality that the move could add to inflation at the margin, and that it comes at a time when the economy is doing well, has prompted critics to say it is difficult to make an economic case for the extension.

“From an economic perspective, this is a very bad decision,” said Ben Ritz, director of the Center for Financing America’s Future at the Progressive Policy Institute. “It’s very expensive, it’s inflationary, it’s regressive. They do this for a few months at a time, which creates uncertainty for borrowers.

Unemployment among college graduates, the biggest beneficiaries of student loan payment deferrals, is currently only 2 percent. For those without a diploma – those who have only graduated from high school – unemployment is at 5.2%corresponding roughly to its pre-pandemic level.

By “regressive,” Mr. Ritz means that student loan deferrals tend to help families with relatively high incomes. Considering the value of an education and considering existing student aid programs, a Brookings Institution analysis found that almost a third of all student debt is owed by the richest 20% of households and only 8% by the poorest 20%.

The program was supposed to provide relief at the height of the pandemic, but has now been extended seven times. Now it will put borrowers in a better financial position to afford homes, ballet lessons and new couches – anything they want to spend their money on instead of payments – as will interest rate increases of the central bank are trying to remove purchasing power from the economy.

“It absolutely makes the Fed’s job harder,” Ritz said.

Stacy Cowley contributed report.