Larry Summers, Art Laffer Agree Biden Student Loan Plan Bad for Inflation

Many with student debt are hoping President Joe Biden will soon announce a program on student loan forgiveness. However, studies show that nearly half of Americans are wary of the impact Biden's decision could have on inflation and what many deem to be an already-receding economy.

The program could forgive up to $10,000 in student loans for those meeting certain income restrictions, with some economists saying the program would be capped for those who make more than $150,000 in adjusted gross income. Those that don't qualify for the forgiveness may have a bit more time before interest continues to collect on their loans.

Biden also is expected to decide on whether or not to extend the freeze on repayment and interest accrual for student loans. That decision would add a seventh extension on the pause that began under the Trump administration. The pause is expected to expire August 31. Biden plans to announce his decision on forgiving student debt before then.

The proposal has some experts and civilians worried about worsening inflation. A poll by CNBC/Momentive found that 59 percent of Americans were concerned about how loan forgiveness could negatively impact inflation. The poll found 32 percent of survey takers were in favor of loan forgiveness for all Americans who have student debt, and 30 percent said that no one should receive loan forgiveness.

President Biden Considers Canceling Student Debt
A sign asking President Joe Biden to cancel student debt on Pennsylvania Avenue near the White House staff entrance during a demonstration. Biden said he planned to announce his decision by August 31. (Jemal Countess/Getty Images for We, The 45 Million) Jemal Countess/Getty Images for We, The 45 Million

According to Forbes, about 45 million Americans owe $1.7 trillion combined in federal student loan debt. Forbes reported that some economists have hopes loan forgiveness could ease inflation by allowing borrowers to spend money that would otherwise go to their loans. That's the perfect recipe for inflation according to economist and author Arthur Laffer, who served on the Economic Policy Advisory Board under the Reagan administration. Laffer said Biden's proposal is a lose-lose for inflation.

"Of course, it will clearly worsen [inflation]," Laffer told Newsweek. "Inflation is really too much money chasing too few goods. There's more to it, but that's a good first step. [Forgiving student loans] will reduce the number of goods, which is inflationary. It will increase the size of the monetary base, which is also inflationary. The two together, I don't know how much it will contribute [to inflation], but it's not a trivial amount."

Laffer estimated that if everyone who qualified received the $10,000, it would cost $440 billion in a $22 trillion economy, or roughly 2 percent. Laffer said 2 percent constitutes a "big number" in economic spending. Laffer also argued that forgiving student loans could lead to less people in an already-scarce labor market.

"What you're doing is getting people out of the labor force not producing goods which will push prices up by itself…and expanding the quantity of money resources available will push prices up," Laffer said. "More money and less goods—both of those combine to give higher inflation."

Larry Summers, a Charles W. Eliot University Professor and President Emeritus, took to Twitter to express his disapproval with the program.

Summers called the student loan relief proposal "unreasonably generous" in a series of tweets published Monday.

"Every dollar spent on student loan relief is a dollar that could have gone to support those who don't get the opportunity to go to college," said Summers, who was secretary of the treasury under President Bill Clinton. "Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college."

Summers said Biden's decision also could worsen inflation by potentially raising college tuition.

"The worst idea would be a continuation of the current moratorium that benefits among others highly paid surgeons, lawyers and investment bankers," Summers added. "If relief is to be given it should not set any precedent, it should only be given for the first few thousand dollars of debt, and for those with genuinely middle class income."

Laffer agreed. He said college tuition will increase with the new program.

"Every college is a tax-exempt entity. All colleges are 501(c)3s," Laffer said. "So what they're going to do is quick as lightning raise the prices of college by the amount of government subsidy dollar for dollar."

Dean Baker, a senior economist at the Center for Economic and Policy Research, doesn't believe the situation to be as dire. If any impact to inflation is made, Baker said it won't be enough to make a major difference.

Since many students already aren't paying their loans because of the repayment pause, a forgiveness program wouldn't impact the economy as much as other economists think.

"If the moratorium didn't end and was extended another year, then it's not inflationary at all," Baker said. "It would be more inflationary if the moratorium were to end."

Baker agrees with $10,000 in loan forgiveness.

"We know a lot of people are in trouble and having difficulty making payments," he said. "I think that's a good amount and the inflationary impact is very small. You're really helping a lot of people that do need it. It's not a big burden in the sense of inflationary impact. It will be very minor, a very good thing."

Biden also could act on existing student loan relief initiatives. Those initiatives include the Limited Public Service Loan Forgiveness (PSLF) Waiver, which temporarily relaxes rules to expand relief available through the PSLF program. The initiative is set to expire October 31.

Newsweek reached out to the U.S. Department of Education for comment.

Update 8/23/22, 11:22 a.m. ET: This story was updated to show the economic impact if student loan forgiveness is granted.