Student Loans

EMEL AKAN is a senior reporter for The Epoch Times in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan. Emel Akan

Political Risks of Student Debt Relief

The Biden administration faces a difficult choice as pressure mounts

President joe biden is making a final decision on whether to fulfill his campaign pledge to cancel student loans at a politically precarious time.

Biden wants to avoid alienating his young supporters ahead of the November elections, but he faces a tough choice, as canceling student debt in the midst of high inflation might spark a backlash, potentially costing his party the midterms.

In April, Biden extended the moratorium on student debt payments for the sixth time through Aug. 31.

Critics say canceling or delaying student loan payments is a bad policy that will merely stoke the flames of inflation and do more harm to the economy.

Debt forgiveness is akin to the Federal Reserve increasing the money supply, according to E.J. Antoni, a research fellow at the Heritage Foundation.

“One of the key things that people don’t realize about debt is that when you take out a loan, you actually are creating money,” Antoni told Insight. “Conversely, when you repay a debt, that is destroying money, so you actually can expand and contract the money supply simply by taking on debt and by repaying debt. When it comes to student loans, the principle is literally no different.”

Since the pandemic began in 2020, the Federal Reserve has poured money into the financial system in unprecedented amounts to protect the economy from the effects of the health crisis and lockdowns. Inflation has surpassed 8 percent this year, a 40-year high, in part because of the Fed’s policies.

The central bank is now preparing to slam on the brakes by tightening the money supply in order to bring inflation under control. However, forgiving student loans will undermine these efforts, making it more difficult for policymakers to combat inflation.

Student loan relief also lowers the incentive to work and affects labor force participation, which retards economic productivity and raises prices, critics say.

According to the Urban Institute, the majority of outstanding student loan debt is carried by those with relatively high earnings.

The Biden administration’s decision could have an effect on nearly 43 million borrowers who owe more than $1.6 trillion in federal student loans.

Unlike other policies, which require congressional approval, the decision to cancel student loans can be taken by the executive branch, according to Democrats. They contend that the president has the unilateral authority to do so because the Higher Education Act of 1965 grants the education secretary the authority to “waive, or release” federal student loans.

Some argue that this unilateral authority is ambiguous and that it might be challenged in courts.

If they attempt to make this move and the courts overturn it, they may suffer more political damage than benefit, Antoni noted.

Proponents of student loan forgiveness claim that the cancellation of some or all of student debt would minimize the negative consequences it has on the economy, such as low homeownership and small business formation. Advocates also argue that student loan forgiveness would help reduce racial income disparities.

Mike Lux, a Democratic political strategist, believes providing broader debt forgiveness would greatly increase young people’s motivation to vote.

“We desperately need to motivate young people to vote to have a chance to win this election,” Lux recently told Washington Post.

However, Biden and Senate Democrats have a major disagreement over the relief amount.

Sen. Elizabeth Warren (D-Mass.) and Senate Majority Leader Chuck Schumer (D-N.Y) have been advocating for a more sweeping package that would forgive up to $50,000 per borrower in student debt.

However, Biden has indicated that he would support relief only up to $10,000 per borrower. He’s also considering imposing income limitations on student loan forgiveness to keep higher-income borrowers out.

According to economists at the New York Federal Reserve, forgiving $10,000 per borrower would cost the government nearly $321 billion. Raising the cap to $50,000 would cost $904 billion.

Because of the political risks, some speculate that the Biden administration may instead seek to extend the moratorium on student loan payments until after the November elections.

Unlike other policies, which require congressional approval, the decision to cancel student loans can be taken by the executive branch, according to Democrats.