August 25, 2022
Student debt cancellation and inflation
Will the small cancellation of some student debt cause some inflation?
Yes, it will cause a little inflation, but not the way you think it will.
Does it matter?
No. Because having massive amounts of government-subsidized debt (that cannot be repaid) sitting in banks is more inflationary than cancelling it.
Is it even at all an interesting or remarkable thing that people who cannot pay their debts will no longer have to try to pay their debts?
For them, yes. For everyone else? No. No, it isn't.
The reality is that cancelling student debt for poor Americans is not even on par with reducing tuition fees. Fully debt-loaded workers cannot take a cancelled student debt and turn it into a nice car—no matter what the right wing keeps going on about.
What is going to cause inflation is that it will become a profit subsidy to banks (eliminating loans from their books) and private colleges (who continue to charge ridiculous fees). Even government-backed student debt in the USA can be used to pay for private university access.
On the other side is the "forgiving" of government-backed debt of "Pell Grant" recipient's. Pell Grant-related debt was taken-on by poor Americans trying to get a higher eduction after Pell Grants were cut in 2012 and have not kept pace with unregulated tuition fee increases. Some Pell "grant" money is also not a grant at all, but a loan.
Some of this is inflationary, some is not. Kind of like making poor students pay more for their education (if you take out debt, you pay more) is deflationary and allowing rich students to get a cheaper education and better jobs because they are rich is inflationary.
Unlike here in Canada, private banks own a significant portion of "student" debt in the USA. If this debt is labeled as education-related debt then the banks have access to federal government subsidies to reduce interest rates paid by the consumer. Like in Canada, you are assessed for access to these "student" reduced-interest loans and they generally do not cover all expenses as the assessment is not based on the amount you need to pay for your education. It is based on your expected ability to pay after graduation.
It is worth noting that the damage done to the economy of limiting access to post-secondary education remains when cancelling a portion of this student debt after graduation.
Some numbers to keep in mind when people say this action is inflationary:
- 94% of Pell Grant recipients come from families making less than $60,000 and 87% of those who get some debt relief will come from families making less than $75,000. So, poor working people.
- Most will still be left paying at least 5% of their income to student debt—more for those who took on private debt to pay for their school (debt that is not reduced).
- 16% of borrowers are in default. Fully cancelling their debt has zero cost on the economy or even the government.
- Black student borrowers will likely still owe 95% of their student debt 20 years after graduation. Cancelling this debt has zero cost on the economy since this is essentially the same as being in default—except the borrower and the government are paying the bank money for nothing.
- Many student debt borrowers struggling to pay their debts did not complete their degree because the loan did not cover enough of later year tuition fees. This kind of debt is just an anchor on the most disadvantaged. Making poor people pay money for something they never received is deflationary.
- Those who can get $20,000 in debt cancellation is cancellation of debt owned by Federal Government. Again, because of all the above that costs nothing.
- Those who can get $10,000 in debt cancellation is government subsidized debt. The impact of this cancellation is mildly inflationary, but probably off-set by the freeing-up of the money subsidizing this debt paid by the federal government.
Canada has a debt cancellation program call the Repayment Assistance Program. This "forgives" massive amounts of debt for those who cannot pay the government back for a public service they should never have had to pay for in the first place.
Such support programs are not inflationary. On the contrary, the price of education is a drag on economic activity and production, which itself can be inflationary.
So, is the cancellation of student debt inflationary?
It is so much the wrong question that it is actually stupid to even make the point.
The real economic damage in the USA is high tuition fees, underfunding of higher education, the privatization of the system, and the alignment of higher education with short-term capital profit maximization of employment outcomes. Until this is fixed, the potential "negative" macro effects of band-aid solutions like cancelling student debt for those who should never have had the debt in the first place is not something the left should even entertain as a discussion point.
Much like whether wage increases cause inflation. "Not causing inflation" does not come into the calculation of what a wage should be. Cancelling student debt is also not about "not causing inflation".
Poor working people making ends meet does not cause inflation. Blind profiteering on the backs of poor people does.
I will go one step farther. If this did cause inflation, it means economists are actually saying that the attempt to fix real world problems created by capitalism is causing inflation. That means that they are admitting that they think there is no other outcome than capitalism resulting in abject poverty, but continue to support it as an economic system anyway.