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Biden forgives millions of student loans; critics fear inflation

Economy Aug 25, 2022 07:16AM ET
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© Reuters. FILE PHOTO: U.S. President Joe Biden pauses as he speaks during a signing ceremony for "The Inflation Reduction Act of 2022" in the State Dining Room of the White House in Washington, U.S. August 16, 2022. REUTERS/Leah Millis/File Photo
 
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By Nandita Bose and Alexandra Alper

WASHINGTON (Reuters) -President Joe Biden said on Wednesday the U.S. government will forgive $10,000 in student loans for millions of debt-saddled former college students, keeping a pledge he made in the 2020 campaign for the White House.

The move could boost support for his fellow Democrats in the November congressional elections, but some economists said it may fuel inflation and some Republicans in the U.S. Congress questioned whether the president had the legal authority to cancel the debt.

Debt forgiveness will free up hundreds of billions of dollars for new consumer spending that could be aimed at homebuying and other big-ticket expenses, according to economists who said this would add a new wrinkle to the country's inflation fight.

The actions are "for families that need them the most - working and middle class people hit especially hard during the pandemic," Biden said during remarks at the White House. He pledged no high-income households would benefit, addressing a central criticism of the plan.

"I will never apologize for helping working Americans and middle class, especially not to the same folks who voted for a $2 trillion tax cut that mainly benefited the wealthiest Americans and the biggest corporations," Biden said, referring to a Republican tax cut passed under former President Donald Trump.

Borrower balances have been frozen since the beginning of the COVID-19 outbreak, with no payments required on most federal student loans since March 2020. Many Democrats had pushed for Biden to forgive as much as $50,000 per borrower.

Republicans mostly opposed student loan forgiveness, calling it unfair because it will disproportionately help people earning higher incomes.

"President Biden's student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt," Senate Minority Leader Mitch McConnell said Wednesday.

The administration has yet to determine the price tag for the package, which will depend on how many people apply for it, White House domestic policy adviser Susan Rice told reporters. Student loans obtained after June 30 this year are not eligible, she said.

White House Press Secretary Karine Jean-Pierre told reporters the administration has legal authority to forgive the debt under a law allowing such action during a national emergency such as a pandemic. Earlier, Republican U.S. Representative Elise Stefanik had called the plan "reckless and illegal."

American university tuition fees are substantially higher than in most other rich countries, and U.S. consumers carry $1.75 trillion in student loan debt, most of it held by the federal government. Biden said other countries could bypass the United States economically if students are not offered economic relief.

PANDEMIC PAUSE, PELL GRANTS

The administration will extend a COVID-19 pandemic-linked pause on student loan repayment to year end, while forgiving $10,000 in student debt for single borrowers with annual income under $125,000 a year or married couples who earn less than $250,000, the White House said.

Some 8 million borrowers will be affected automatically, the Department of Education said; others need to apply for forgiveness.

The government is also forgiving up to $20,000 in debt for some 6 million students from low-income families who received federal Pell Grants, and proposing a new rule that protects some income from repayment plans and forgives some loan balances after 10 years of repayment, the Education Department said.

A New York Federal Reserve study shows that cutting $10,000 in federal debt for every student would amount to $321 billion and eliminate the entire balance for 11.8 million borrowers, or 31% of them.

INFLATION IMPACT

A senior Biden administration official told reporters the plan could benefit up to 43 million student borrowers, completely canceling the debt for some 20 million.

After Dec. 31, the government will resume requiring payment on remaining student loans that were paused during the pandemic. The official said this would offset any inflationary effects of the forgiveness. Payment resumptions could even have a dampening effect on prices, the official said.

Former U.S. Treasury secretary Larry Summers disagreed. He said on Twitter (NYSE:TWTR) https://twitter.com/LHSummers/status/1561701544600428545 that debt relief "consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions."

Similarly Jason Furman, a Harvard professor who headed the Council of Economic Advisers during the Obama administration, said debt-cancellation would nullify the deflationary powers of the Inflation Reduction Act. "Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless," he said.

Moody's (NYSE:MCO) analytics chief economist Mark Zandi sided with the White House, saying the resumption https://twitter.com/Markzandi/status/1560267089180753922?s=20&t=NLcHCM-XfKX8Z_7MOBanDQ of billions of dollars per month in student loan payments "will restrain growth and is disinflationary."

Biden forgives millions of student loans; critics fear inflation
 

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Comments (38)
James Hilliard
James Hilliard Aug 25, 2022 2:51PM ET
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The ONLY things stoking the flames of inflation are oil/gas/energy prices mixed with Biden and Trump tariffs on alternative energy.
Jamie Kent
Jamie Kent Aug 25, 2022 2:51PM ET
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Yes, creating money out of thin air has nothing to do with it...🙄
Santosh Oak
Santosh Oak Aug 25, 2022 10:26AM ET
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Isn't Biden trying to bribe voters?It is a blatant attempt at Buying votes?
Tre Hsi
Tre Hsi Aug 25, 2022 10:26AM ET
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yes, but perhaps not as blatant as The Orange One putting his name on all the Covid relief checks mail out by IRS
Dave Sa
Dave Sa Aug 25, 2022 10:26AM ET
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Tre Hsi TDS much? Does he haunt your dreams?
Bill Powers
Bill Powers Aug 25, 2022 10:26AM ET
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one quick look at tre hsi's comments and I'd say Trump haunts his life. Kind of sad really.
ZS Beck
ZS Beck Aug 25, 2022 10:26AM ET
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Next, is another stimulus check 2 years from now to buy votes. Worked the first time
ZS Beck
ZS Beck Aug 25, 2022 9:42AM ET
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What's next? PPP loan forgiveness?People were taking on the loans, based on lies, then gambling in the stock market and losing it. Let's forgive PPP Loans also.Why I'm paying for somebody else worthless education?
Ethel Basset
Ethel Basset Aug 25, 2022 9:05AM ET
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Worthless degrees are a waste of time and money.
Tre Hsi
Tre Hsi Aug 25, 2022 9:05AM ET
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says all the graduates of Trump University....
Maximus Maximus
Maximus Maximus Aug 25, 2022 9:05AM ET
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yeah, maybe under your rock in yahoo-trumpanzeeland
Jamie Kent
Jamie Kent Aug 25, 2022 9:05AM ET
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There is a valid point there: Why are they giving out loans for students to earn degrees that don't result in higher pay and employment opportunities? That sounds like a poor choice for the lender. Loan availability should be based on the potential future earning of the degree being pursued; otherwise how do they expect to be repaid? Honestly the real problem isn't the loans, it's the cost of the degree in the first place. Make college more affordable or even free in an online capacity. There is little reason for there to not be free online education available to the public besides greed. Doing that would naturally bring down costs of brick and mortar colleges as well if they are in competition with a free convenient alternative.
gab nea
gab nea Aug 25, 2022 7:48AM ET
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the Republicans fear everything, other religions, they fear for their safety, thus guns. they fear immigrants like their grandparents.
Maximus Maximus
Maximus Maximus Aug 25, 2022 7:48AM ET
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yep, whining little p(ussies) that's all they are
Bill Powers
Bill Powers Aug 25, 2022 7:48AM ET
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Maximus Maximus so you're a republican then?
gab nea
gab nea Aug 25, 2022 7:30AM ET
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the name" Nancy" like the name " Hillary" before it, gets the Republican's *****in a knot! they hate strong honest women!
Maks Mars
Maks Mars Aug 25, 2022 7:30AM ET
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they just hate vipers lol
M. Turner
M. Turner Aug 25, 2022 7:29AM ET
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And another $4 billion to Ukraine.  Printing press is humming away. When will people realize that it is only monopoly money in their pocket.
gab nea
gab nea Aug 25, 2022 7:29AM ET
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what? you are putting a price on bombing children's hospitals, schools, and homes by a trump like cruel liar cheater grifter! how did putin get 80 billion ?
Tre Hsi
Tre Hsi Aug 25, 2022 7:29AM ET
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a few billions to degrade Russian military and frustrate Putin while not losing a single american life?  the best way to spend tax money!
Dave Sa
Dave Sa Aug 25, 2022 7:29AM ET
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gab nea why arent you over there helping?
Jamie Kent
Jamie Kent Aug 25, 2022 7:29AM ET
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I'm already there....its just paper. Yes its valuable now, but it might not be worth much in the future. If you don't need it for bills and food, find something else to convert it into. Whatever you do don't sit on big pile of cash.
gab nea
gab nea Aug 25, 2022 7:28AM ET
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great president for the people, unlike the liar, cheater , grifter in chief!
CS Greer
CSGreer Aug 25, 2022 6:55AM ET
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Even Nancy Pelosi said he doesn't have the power to do this.
gab nea
gab nea Aug 25, 2022 6:55AM ET
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boo hoo hoo!
Aug 25, 2022 4:45AM ET
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buying votes a new low for america
Robert Cox
Robert Cox Aug 25, 2022 4:45AM ET
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Is that why Trump sent out self-agrandizing letters with every stimulus payment during his one term?
 
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