Why wouldn’t President Biden cancel student debt in August?

Millions of student loan borrowers are set to begin repayment on their debt next month, unless, President Biden forgives the debt or extends the moratorium for the seventh time.

When the covid-19 pandemic first took hold in the US, and a massive wave of unemployment swept the country, President Donald Trump implemented a mortarium on student loans. Many economists beleived that if income was going to pay back debt, essentially owned by the governement, the economy could enter a recession.

Now, with inflation driving up consumer prices, some of these economists still see the threat student loan payments cutting into consumer spending rates. With many paying higher for housing, food, and utilities, Daniel J. Milan, a financial advisor for Cornerstone Financial Services, told Forbes that a “borrower may feel more stress when it comes to maintaining their student loan payments.”

Candidate v. President Biden on the the topic of student loans

Presidnet Biden campaigned on a proposal to solve the student debt crisis, which included a provision to forgive up to $10,000 in student loans. To the dismay of many leaders, activists, and borrowers, such an announcement has not come.

Since taking office, President Biden’s administration has walked back the cancellation commitment, arguing instead that if Congress were to pass a bill for loan forgiveness, he would be happy to sign it.

This is far from the platform President Biden was elected on, which included the proposal from Elizabeth Warren to “immediately cancel a minimum of $10,000 of student debt per person.”

Could canelling student loan debt increase inflation?

As November nears, many Republican leaders have criticized the notion of debt cancellation saying that it is a giveaway to the rich and will contribute to inflation.

The proposal to make debt cancellation universal, meaning it is applied regardless of income, is done in part to increase favorability of the program. However, Republicans have not seemed interested in taking on a more “progressive” plan that would cancel up to $25,000 for those making less than $75,000 a year, which benefit the “bottom 40 percent of the income distribution [who would] receive almost twice as much money.” This policy proposal has been touted by J.P. Morgan Chase, the only issue being that it ignores those within this income group who have upwards of $100,000 in debt, compared to those at the upper ends of the income distribution who have significantly less.

The personal and economic cost of ending the student debt moratorium

In July, average prices held steady, halting a historic surge in prices that has led to an 8.5 percent increase compared to the figure captured twelve months ago.

One of the reasons that President Biden may choose not to extend the moratorium or engage further with cancellation would be to decrease household purchasing power, cutting demand, which some economists believe would lead to a decrease in prices. This is the same monetary theorizing that led the US Federal Reserve to increase interest rates by 1.5 percent in just two short months earlier this summer. With less money moving through the economy on the demand side, prices should fall to meet supply.

Supply chains that have struggled to be rebuilt after the destructive impacts of the covid-19 pandemic, coupled with high energy prices, have contributed to historic inflation - but there are other factors that should be considered as well.

Forcing borrowers to begin the repayment of their debt would be a particularly brutal way of lowering prices, especially considering how corporate greed has contributed to the current financial and student loan crises.

Take the monopolized and highly consolidated corporate consolidation, for instance. Tyson Foods, which supplies around a fifth of all beef, chicken, and pork in the US has reported price increases well above industry averages between 2021 and 2022. The firm has recorded billions in profits, with their quarterly reports showing that they are taking revenue at levels well above their labor, transpiration, and production costs.

Constellation Brands CFO Garth Hankinson said on an investor call that the company planned to “take as much pricing as we think the consumer can absorb.” In other words, their price increases were not purely based on their costs but rather the highest price for their goods the average consumer was willing to pay. Further ethical lines come into focus when looking at a company like Constellation Brands, which sells a highly addictive product: alcohol.

So at a time of 1920s-style income inequality, President Biden may use the economic pain of student loan borrowers to offset inflation.

Last month, average prices had increased 9.1 percent from July 2021, and wages had increased 5.2 percent – meaning that workers have seen an average pay cut of 3.9 percent.

Inflation has also impacted personal savings in significant ways.

In December 2021, personal savings stood at 8.7 percent of total income or around $1.5 trillion. Savings rate shot up throughout 2021 as the third stimulus check and the enhnaced child tax credit were distributed to millions of households. Each time these payments were made, househodls chose to save part of it. After the payments ended in early 2022, the saving rates plummeted from 5.8 percent in January to 5.1 percent in June. The total amount saved by households also fell to $944.5 billion in June, the lowest level captured January 2021. Inflation has eaten away at personal savings bringing the rate to one not seen since the height of the 2008 Financial Crisis.

With the average student loan payment each month being $393, and with 44 million borrowers owing debt, savings could be cut by $18 billion a month if the mortarium is lifted. This would have regressive impacts with those with lower incomes facing even greater challenges for saving. Advocates for student loan cancellation do not think restarting payments fosters an environment conducive to financial resilience through such a possibly turbulent time in the market.