President Biden, who has come under fire for rapid inflation and a search for ways to help ease the rising costs of families, has extended the student debt payment moratorium until August. While the move is politically popular with Mr Biden’s party, it has drawn criticism for adding too little oomph to the very inflation the government is trying to tame.
America’s robust economic recovery from the deepest lockdowns of the pandemic era has left consumers with spending power and led to rapid price increases. These higher costs are making voters unhappy, and threatening Democrats’ chances of retaining control of Congress by November.
The moratorium extension has emerged as an example of a more general problem facing the administration: Policies that help families expand their budgets can appease voters, but they may add a little fuel to the inflationary conflagration at an inopportune moment. Most important, analysts said, they risk sending a signal that the administration is not focusing on tackling rising prices despite the president’s pledge to help cut costs.
Inflation is at its fastest pace in 40 years and more than triple the Federal Reserve’s 2 percent target, as rapid buying collides with tight supply chains, labor shortages and a limited supply of housing to drive prices higher.
The administration’s decision to extend the student loan moratorium until August 31 will keep the money in the hands of millions of consumers who can spend it, helping to sustain demand. While the impact on growth and inflation will likely be minimal — Goldman Sachs estimates it could potentially add about $5 billion a month to the economy — some researchers say it sends the wrong message and comes at a bad time. The economy is booming, jobs are plentiful, and conditions seem ideal to bring borrowers back to repay.
“Four months by themselves is not going to make you hyperinflation,” said Mark Goldwyn of the Committee on Responsible Federal Budget, noting that a one-year moratorium would only add about 0.2 percentage points to inflation, he estimated. “But it’s four months, on top of four months before that.”
Additional aid to student borrowers could, on the margins, serve purposes opposing the recent changes in Fed policy, which are aimed at shedding household purchasing power and quelling demand.
The Fed raised interest rates in March for the first time since 2018, and is expected to make a larger increase in May as it tries to slow spending and give supply chains some breathing room. It is trying to weaken the economy enough to put inflation and the economy on a sustainable path, without plunging it into recession. If history is any guide, doing so will be a challenge.
A chorus of economists took to Twitter to express their frustration with the decision on Tuesday, when news of the administration’s plans broke.
“Wherever one stands about student debt relief, this approach is regressive, creates uncertainty, is untargeted and inappropriate at a time when the economy is overheating,” Lawrence H. wrote. Summers, a former Democratic Treasury secretary and Harvard economist who has been warning of inflation risks for months. Douglas Holtz-Eaken, a former director of the Congressional Budget Office who now directs the American Action Forum, a self-described center-right policy institute, sum it up like this: “aaaaaaarrrrrRRRRGGGGGGGGHHHHHHHH!!!!!!!!!!!!”
after Stronger action supporters He argued that the endowment was not enough – and that the affected student loans should be eliminated entirely. Senator Chuck Schumer of New York, the Democratic leader, and Elizabeth Warren of Massachusetts are among lawmakers who have repeatedly lobbied Biden to eliminate up to $50,000 per borrower through executive action.
The stark divide underscores the administration’s tightrope as the November 8 elections approach, with Democrats’ control of the House and Senate remaining balanced.
Sarah A. said: “They’re buying political time,” Bender, a professor of political science at George Washington University, wrote in an email. “Kicking the can down the road — with another extension, sure, before the elections this fall — seems to be the politically optimal move.”
The administration is taking a calculated risk when it comes to inflation: Student loan deferrals are unlikely to be a major factor driving inflation higher this year, even if they add a little extra power to demand. At the same time, staying in politics avoids a political brawl that could taint the reputation of the administration and the Democratic Party ahead of the November elections.
White House officials emphasized Wednesday that the tiny amount the delay adds to the economy each month will have only a marginal effect on inflation. But they can help vulnerable families – including those who haven’t finished their degrees and have worse job prospects.
The New York Fed suggested in recent research that some borrowers could struggle with payments and report a “meaningful rise” in delays once payments start again. Mr. Biden referred to those federal statements during his announcement. The Department of Education has proposed that borrowers get a “fresh start” that automatically eliminates defaults and defaults and allows them to start repayments, once it resumes, in good standing.
“We are still recovering from the pandemic and the unprecedented economic disruption it has caused,” Mr. Biden said.
Student loans: essential things to know
This step can ease the pain of a momentary inflation for some families. Voters are very unhappy because inflation is killing their paychecks and canceling out many workers’ payroll gains. A recent Gallup poll showed that concerns about inflation have risen to their highest level since the 1980s, and while they are lower among Democrats than among Republicans, they are rising across party lines.
Some proponents of extending the moratorium cited inflation as part of their reasoning.
“This is an important step to ensure that working families’ expenditures do not rise as we work to combat inflation and corporate greed,” said Representative Pramila Jayapal, Democrat of Washington, wrote on twitter.
But the fact that the move could add to marginal inflation, and that it comes at a time when the economy is rocking hard, has led critics to argue that it is hard to make an economic case for an extension.
“From an economic perspective, this is a very bad decision,” said Ben Ritz, director of the Center on Financing America’s Future at the Institute for Progressive Policy. It’s too expensive, it’s hypertrophic, it’s regressive. They do it for two months at a time, so it creates uncertainty for borrowers.”
Unemployment among college graduates, who are the biggest beneficiaries of student loan deferrals, is just 2 percent. For those without a degree — people who have only graduated from high school — unemployment is 5.2 percent, roughly equal to the pre-pandemic level.
By “retrograde,” Mr. Ritz means that student loan deferrals tend to help relatively high-income families. When calculating the value of education and adapting to current student relief programs, a Brookings Institution analysis found that nearly a third of all student debt is owed by the richest 20 percent of households and only 8 percent by the lowest 20 percent.
The program was intended to provide relief in the depths of the pandemic, but has now been extended seven times. Now it will put borrowers in a better financial position to afford homes, ballet lessons, new sofas – whatever they want to spend their money on instead of payments – just as central bank rate increases attempt to take purchasing power out of the economy.
“It certainly makes the Fed’s job more difficult,” said Mr. Ritz.
Stacy Cowley Contribute to the preparation of reports.