Much of the focus of the opposition to President Biden’s effort to forgive student loans has been on its constitutional problems and its unfairness.
The president is exceeding his authority by taking an action that should be reserved for Congress. The courts will have to decide that question.
There are also objections to the equity of his action. Why should those who didn’t attend college, or those who didn’t borrow to get through, or those who paid off their loans subsidize those who knowingly took on this financial obligation?
But there is at least a third point to consider. In trying to help more than 40 million borrowers — including a sizable percentage who are earning enough that they don’t need the help — Biden could be making inflation worse for everyone.
The cause of today’s rise in prices, the most in 40 years, is clear. The government went overboard in its disaster assistance during the COVID-19 pandemic. Early in the crisis, the money Washington threw at individuals and businesses was necessary to avoid a total meltdown of the economy. But, the government kept it up even after the economy began its fairly rapid rebound, including enacting an additional $1.9 trillion package during the early months of Biden’s presidency.
With so much money out there to spend, and supply chains disrupted, it produced exactly what the law of supply and demand has repeatedly proven: When demand exceeds supply, prices rise, and they don’t come down until that balance is reversed.
Student loan forgiveness, if it’s not stopped by the courts, will slow that correction. It will add roughly another $400 billion in spending power. That means, instead of borrowers making a monthly installment on their student loans, they will have that extra money to spend on travel, consumer goods, eating out and anything else that money can buy. That will create further upward pressure on prices and impede the efforts of the Federal Reserve to tame inflation by raising interest rates.
The probable result: more inflation and even higher borrowing costs.
Sure, there will be some who will net out positively. Their amount of debt forgiveness will exceed the extra they have to pay for goods and services. But for most Americans, including some who have their student debt erased, they will be worse off than if the president had done nothing.
