Student-Loan Forgiveness: Inflation Reduction Act Revelations

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Student-loan forgiveness could cost more than a half-trillion dollars with the debt cancellation initiative expected to swell the deficit far beyond the new inflation law’s deficit-reduction benefit

Isaac NurinaniBullion.Directory precious metals analysis 03 September, 2022
By Isaac Nuriani

CEO at Augusta Precious Metals
student-loan-forgiveness
If you’re a long-struggling college graduate burdened with mountains of student debt, it seems your load is now just a bit lighter. By executive order, President Biden recently did a whole lot of student-loan forgiving.

There are three principal components to the president’s plan: Debt cancellation, forbearance and a new income-driven repayment (IDR) system. These are the high points:

  • Debt cancellation. Individuals who earn less than $125,000 per year ($250,000 for families) will be eligible to have up to $10,000 in federal student loan debt canceled. Those who received Pell Grants could see as much as $20,000 of their federal student loan debt canceled.
  • Forbearance. The president’s action also extended student loan forbearance (also called the “payment pause”) through December 31, 2022.
  • Income-driven repayment (IDR). This feature is particularly generous. Under what would be new guidelines for IDR, undergraduate borrowers would see monthly payments capped at 5% of discretionary income, and no longer at the currently prevailing standard of 10%. Also, the non-discretionary-income threshold would be raised, thereby excluding more of what would otherwise count as discretionary income for purposes of the repayment calculation. The new IDR system would also cover the borrower’s unpaid monthly interest.[1]

You may have heard there are questions about the legality of the president’s sweeping action. That’s because, per the Constitution, the so-called “power of the purse” rests exclusively with the U.S. Congress. There are reasons why Biden believes the legal path he has taken in this case is sound, but some legal experts disagree.

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I don’t want to get bogged down on that particular issue right now. For the sake of this article, let’s assume President Biden has the authority to take the action he did.

What I want to do is to discuss this act of student loan forgiveness through the lens of the Inflation Reduction Act (IRA). I’ll explain.

The foundation of the Inflation Reduction Act’s assault on soaring prices is deficit reduction. The working theory this tactic is based on is this: Less government spending and higher taxes conspire together to keep a lid on demand and, by consequence, inflation.

It’s estimated that the key provisions of the IRA designed to shrink the deficit will do so by about $264 billion over the next decade.[2] It’s unlikely this amount of deficit reduction will have any material impact on inflation, but let’s assume it does.

Here, really, is the question I want to answer here:

Reducing inflation through deficit reduction supposedly is viewed by the president as so important that it mandated swift passage of a law designed to do just that. Given this, why did he – just two weeks later – unveil a student-loan forgiveness plan that not only offsets all of the deficit reduction outlined in the Inflation Reduction Act but likely will significantly expand the deficit?

I’m going to piece together what I think is the answer to that question. And when we get to it, I believe it will further underscore why it remains not only appropriate but essential that Americans continue second-guessing the economic messaging they’re receiving from Washington.

First things first; let’s begin our journey with a look at just what the costs of student-loan forgiveness are projected to be.

 

Budget Analysts: Loan Forgiveness Will Expand Deficit by Twice What IRA Saves

I mentioned earlier that the Inflation Reduction Act seeks to fight inflation by cutting the deficit, and that the projected amount of deficit reduction to be realized will be around $264 billion. According to the projections of economists, however, student debt cancellation returns all that money – and a lot more – to the deficit, thereby calling into serious question the very premise of the Inflation Reduction Act.

We’ll talk more about that in just a bit. For now, let’s take a closer look at some student debt cancellation cost projections.

According to the Committee for a Responsible Federal Budget (CRFB), the estimated total cost of the features associated with the president’s executive action will run between $400 billion and $600 billion. In a statement, Maya MacGuineas, CRFB president, had this to say about the debt-cancellation gesture in terms of deficit reduction and the Inflation Reduction Act:

Policymakers have already spent $300 billion on student debt relief—none of it paid for, and this would add another $400 to $600 billion, again, none of it paid for. This action by the White House is completely at odds with their talk of deficit reduction. It could add twice as much to the deficit as was just saved from the Inflation Reduction Act, completely eliminating any deficit reduction and then some.[3]

As you might expect, the increased size of the deficit could add to inflation pressures – something the CRFB makes sure to point out. In their estimation, cancellation of $10,000 in debt per household could add 15 basis points to the Personal Consumption Expenditure (PCE) inflation rate right away and also add to price pressures going forward. Separately, the CRFB said a mere one-year pause in the repayment of student debt could add up to 20 basis points to PCE.[4]

Projections of debt cancellation’s total costs made by the Penn Wharton Budget Model are considerably more worrisome. In a breakdown of costs per the forgiveness plan’s three principal features, Penn Wharton forecasts the “damage” this way:

  • Explicit debt cancellation: $519 billion
  • Loan forbearance: $16 billion
  • Income-driven repayment (IDR) program: $70 billion.[5]

That’s a total of $605 billion – considerably more than two times what Penn Wharton estimates will ultimately be realized in deficit reduction from the Inflation Reduction Act.[6]

Penn Wharton: Eventual Cost of Student-Loan Forgiveness Could Reach $1 Trillion

Penn Wharton suggests an even more ominous possibility: that the total eventual cost of the student loan forgiveness plan could reach approximately $1 trillion, doing so on the prospective basis of the IDR feature ultimately costing a whopping $450 billion.[7]

Penn Wharton’s speculation that the IDR could prove to be so much more expensive than the current estimate is rooted in the possibility that the Department of Education (ED) might simply auto-enroll eligible borrowers – for which they have the requisite information – into the program. That is to say, rather than making IDR a program for which eligible borrowers must opt in, the ED could instead change the enrollment mechanism to one where eligible borrowers would have to opt out in order to not participate.[8]

Even absent this more dire cost outcome of student loan forgiveness, however, there seems little dispute that the unilateral action taken by the president will eliminate – and then some – the Inflation Reduction Act’s deficit-reduction benefits.

So, what’s going on? Why are all the ostensibly “good works” of the Inflation Reduction Act – at least in terms of deficit reduction – being put at risk by the president for the sake of student-loan forgiveness?

Could it be that – despite the name – inflation reduction was never the intended focus of the Inflation Reduction Act?

 

Think Tank: References to Inflation Reduction Act as an Inflation-Reducer Are Hard to Find

The American Institute for Economic Research (AIER) certainly seems to think it’s dubious that the Inflation Reduction Act really was intended as a tool to reduce inflation. In a recent article at its website, the AIER essentially pokes fun at the notion that a serious effort at inflation reduction was ever the point of the IRA by providing several examples of mainstream news organizations discussing the law exclusively as a climate change, health care and tax “reform” law.

The AIER points one of its fingers at the New York Times, which as part of its coverage of the legislation asks in a headline, “What’s in the Climate, Tax and Health Care Package?”[9] No mention of inflation there. And in the article itself – which provides a long, detailed explanation of the law’s “benefits” – the word “inflation” is not used even one time except when the title of the law is referenced.[10]

AIER points another finger at website of New Hampshire Public Radio (NHPR), which announced in a recent headline that “Biden Signs Sweeping Climate, Health Care, Tax Bill Into Law.”[11] No reference to inflation here, either – and only one offhand use of the word “inflation” in the entire body of the associated article.[12]

In fact, the first sentence of the story associated with that NHPR headline actually begins, “President Biden signed Democrats’ hallmark spending bill into law…”[13]

Does anyone generally think of federal government spending as an inflation-reducer?

AIER also cites a recent NBC News poll question about the new law that queried voters this way:

“Democrats recently passed legislation supported by President Joe Biden that addresses health care and prescription drug prices, climate change, taxes for corporations, and the federal budget deficit. Do you think it was a good idea or a bad idea?”[14]

Once again, not a word about inflation.

In keeping with the same theme, I found the official statement that Treasury Secretary Janet Yellen issued upon the Inflation Reduction Act’s passage to be particularly revealing. Here’s how it opened:

“Today is an historic day for our country and our economy. The Inflation Reduction Act of 2022 will make America more competitive, lower health and energy costs for families, create high-quality jobs, bolster our energy security, sharply lower emissions, reduce the budget deficit, and increase long-term economic growth.”[15]

Surprise, surprise – no mention of inflation. Yellen’s full statement is three paragraphs in length – and nowhere in it is there a reference to reducing inflation. As a matter of fact, other than where she mentions the new law by name, Yellen doesn’t even use the word “inflation” in her statement.

Is the picture getting clearer?

Let’s finish up.

 

My View: Loan Forgiveness Makes Sense When You Realize Inflation Fight Isn’t Serious

A recent article at Reuters.com shines a bit of a light on the inherent contradictions of the Inflation Reduction Act and the anticipated fiscal consequences of the student-loan forgiveness plan.

In the piece, Alan Auerbach, public finance economist at the University of California, Berkeley, refers to the loan-forgiveness move made in the shadow of the Inflation Reduction Act’s passage as “bad economic policy.” He then adds:

“To switch from saying ‘we’re doing this in a responsible manner’ to turning around and blowing all the money they saved and more, from a policy perspective, it makes no sense.”[16]

I disagree. I think it makes all the sense in the world.

In my view, the only way it doesn’t make sense is if you actually believe that the Inflation Reduction Act is really about lowering inflation. It isn’t. In my opinion, it never was.

How could it be? The only principal feature of the Inflation Reduction Act that addresses monetary inflation is deficit reduction. But the amount of deficit reduction projected to be achieved by the new law is maybe 2% of estimated cumulative deficits over the next 10 years.[17]

To view that in what I think is the most telling context, note that the nation’ entire M2 money supply expanded by more than 40% in just the last two and a half years – a reality, by the way, to which respected economists John Greenwood and Steve Hanke attribute our current inflation plight.[18]

Yet we’re supposed to believe that Democrats seriously see a mere 2% reduction in the deficit over the next 10 years as genuine remedy for this inflation. For me, that’s impossible to accept.

Which brings me to this conclusion: President Biden and Democrats don’t see the deficit-expanding provisions of unilateral student loan forgiveness as being at all inconsistent with the Inflation Reduction Act. That’s because the Inflation Reduction Act was never intended to address inflation in any serious and legitimate way.

Isaac Nurianibullion.directory author Isaac Nuriani

Isaac Nuriani is CEO at Augusta Precious Metals, America’s leading gold IRA specialists and Bullion.Directory’s go-to precious metals dealer for HNW (High Net Worth) investors.

Issac’s passion is educating and empowering retirement investors to protect their savings. He is a member of Ethics.net and the Industry Council for Tangible Assets (ICTA) – and leads a team of financial professionals at Augusta who share his commitment to service with integrity, as they help retirement savers use silver and gold IRAs to achieve effective diversification.


[1] WhiteHouse.gov, “FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most” (August 24, 2022, accessed 9/1/22).
[2] Penn Wharton Budget Model, “Senate-Passed Inflation Reduction Act: Estimates of Budgetary and Macroeconomic Effects” (August 12, 2022, accessed 9/1/22).
[3] Committee for a Responsible Federal Budget, “Debt Cancellation Plan Is Costly, Inflationary, and Cynical” (August 24, 2022, accessed 9/1/22).
[4] Committee for a Responsible Federal Budget, “Cancelling Student Debt Would Undermine Inflation Reduction Act” (August 16, 2022, accessed 9/1/22).
[5] Penn Wharton Budget Model, “The Biden Student Loan Forgiveness Plan: Budgetary Costs and Distributional Impact” (August 26, 2022, accessed 9/1/22).
[6] Penn Wharton Budget Model, “Senate-Passed Inflation Reduction Act.”
[7] Penn Wharton Budget Model, “The Biden Student Loan Forgiveness Plan.”
[8] Ibid.
[9] Michael Graham, AIER.org, “What Happened to Reducing Inflation?” (August 24, 2022, accessed 9/1/22).
[10] Emily Cochrane and Lisa Friedman, New York Times, “What’s in the Climate, Tax and Health Care Package” (August 7, 2022, accessed 9/1/22).
[11] Graham, “What Happened to Reducing Inflation?”
[12] Barbara Sprunt, NHPR.org, “Biden signs sweeping climate, health care, tax bill into law” (August 16, 2022, accessed 9/1/22).
[13] Ibid.
[14] Graham, “What Happened to Reducing Inflation?”
[15] U.S. Department of the Treasury, “Statement by Secretary of the Treasury Janet L. Yellen on the Passage of the Inflation Reduction Act of 2022” (August 12, 2022, accessed 9/1/22).
[16] David Lawder, Reuters.com, “Analysis: Biden’s student loan forgiveness may erase savings of climate, drugs law” (August 29, 2022, accessed 9/1/22).
[17] Congressional Budget Office, “The Budget and Economic Outlook: 2022 to 2032” (May 2022, accessed 9/1/22).
[18] John Greenwood and Steve H. Hanke, Wall Street Journal, “The Fed Ignored the Money Supply, and a Recession Is Coming” (July 7, 2022, accessed 9/1/22).

This article was originally published here

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