Cancellation of loans will fuel inflation

Opposition to President Biden’s efforts to cancel student loans has largely focused on his constitutional issues and unfairness.

The president is overstepping his authority by taking action that should be reserved for Congress. The courts will have to decide this question.

There are also objections to the fairness of his action. Why should those who have not attended college, or those who have not borrowed to get by, or those who have repaid their loans subsidize those who have knowingly assumed this financial obligation?

But there is at least a third point to consider. By trying to help more than 40 million borrowers — including a sizable percentage who earn enough not to need help — Biden could make inflation worse for everyone.

The cause of the current price rise, the highest in 40 years, is clear. The government has gone too far in its disaster relief during the COVID-19 pandemic. At the start of the crisis, the money Washington poured out to individuals and businesses was needed to prevent a total collapse of the economy. But the government kept it going even after the economy began its fairly rapid rebound, including enacting an additional $1.9 trillion package in the first months of Biden’s presidency.

With so much money to spend and disrupted supply chains, it has produced exactly what the law of supply and demand has proven time and time again: when demand exceeds supply, prices rise and they do not fall until this balance is reversed.

Student loan forgiveness, if not stopped by the courts, will slow this correction. This will add about another $400 billion in purchasing power. This means that instead of borrowers making a monthly payment on their student loans, they will have that extra cash to spend on travel, consumer goods, restaurants, and anything else money can buy. This will create additional upward pressure on prices and hamper the Federal Reserve’s efforts to control inflation by raising interest rates.

The likely result: more inflation and even higher borrowing costs.

Of course, there will be some who will come out of it positively. The amount of their debt forgiveness will exceed the extra they will have to pay for goods and services. But for most Americans, including some whose student debt has been erased, their situation will be worse than if the president had done nothing.

About Kimberly Alley

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