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President Joe Biden is considering canceling the student loan debt of millions of Americans, a move that critics say could increase inflation and further worsen the country’s economic woes.
“I’m looking at facing debt reduction,” Biden told reporters this week.
Biden added that he would not forgive up to $50,000 in debt per borrower, a figure that had already been wavered, but that he would look closely at another plan. He said he would provide more details in the coming weeks.
Meanwhile, as inflation remains high, bipartisan groups are worried about federal spending, and the latest economic reports show the economy contracted in the last quarter.
Critics say canceling student loan debt would further increase federal debt and inflation, which is at the highest rate in decades.
“Cancelling student debt can be an extremely attractive political talking point, but it’s not good policy,” said Maya MacGuineas, chair of the nonpartisan Committee for a Responsible Federal Budget. “It’s expensive, inflationary, poorly targeted, and doesn’t address the fundamental problems of our higher education funding system.
“Either the president is serious about cutting deficits and getting inflation under control or he isn’t,” she added. “The White House can’t have it both ways. We need to focus on a serious, effective agenda that prioritizes sound policies, not misdirected political giveaways.”
Economic pressures from inflation, fueled in part by soaring federal debt spending in recent years, are making Americans feel the negative effects. A recent study found that they cut back on discretionary spending to focus on the essentials. A recently released Gallup poll reports that Americans rate inflation as a top concern.
“American confidence in the economy remains very low, and mentions of economic issues as the most important issue in the United States are at their highest level since 2016,” Gallup said. “Inflation, which registered as the main economic problem last month and continues to do so, was earlier at this level in 1984.”
A recent survey by NEXT Insurance found that one in three small businesses have considered closing their doors.
“According to a new survey from NEXT Insurance, small business owners across the United States are frustrated and stressed about inflation and the state of the economy,” the group said. “More than a third have considered closing in the last 12 months. As prices continue to rise and supply chains continue to weaken, many small business owners have been forced to work longer hours, raise prices and even cut their own wages just to stay afloat, according to our investigation. And the majority of small business owners think the pain is not over.
The Bureau of Economic Analysis reported this week that the economy contracted 1.4%, contradicting forecasts that the economy would expand 1%. The data comes after the economy grew nearly 6% in 2021, a year of rebound from the economic difficulties of the COVID-19 shutdowns.
The Federal Reserve has announced a series of interest rate hikes to fight inflation, but some experts doubt they will succeed or worsen the economy.
“An overheating U.S. economy will cause the Fed to act more aggressively to fight inflation,” said Orphe Divounguy, chief economist at the Illinois Policy Institute. “Faster inflation will weigh on US economic growth. However, more aggressive action by the Fed – to bring inflation down – could also push the economy into a recession. To curb inflation, either demand must fall or America needs a miraculous increase in productivity. The latest economic data should lead to faster and more aggressive rate hikes.
“Unfortunately, the Fed has rarely succeeded in bringing inflation down without precipitating a recession,” he added.
These economic difficulties have raised the stakes for possible debt cancellation. Biden, however, has already forgiven some student debts. The Department of Education recently announced ‘immediate debt cancellation’ for 40,000 borrowers via civil service loan forgiveness after years of complaints about the scheme’s mismanagement. While the number of forgiven borrowers was relatively low, it raised more questions about larger forgiveness.
MacGuineas added that even partial debt cancellation would be costly.
“Complete debt cancellation would be a massive windfall for wealthy doctors and lawyers, deepen our inflation crisis, and cost nearly as much as the entire 2017 tax cuts,” she said. “Even partial debt cancellation would be costly, regressive and inflationary. A $10,000 per person forgiveness of debt would cost as much as universal preschool or a full extension of the ACA’s expanded grants.
Whether or not Biden cancels student loan debt, experts say the United States could face a bumpy economic crisis and even a recession.
“On the one hand, this economic report shows that U.S. demand is holding up against many headwinds – COVID, supply chain issues, labor shortages, a slowing global economy, war in Europe and rise in commodity prices,” Divounguy said. “This is because personal consumption expenditure – about 70% of GDP – and investment have actually increased despite price increases. On the other hand, higher input costs for producers are hurting economic prospects. Rising inflation is dragging down US output and exports Uncertainty in Europe and a weaker global economy have also strengthened the US dollar and US imports are soaring. , the decline in net exports subtracts from GDP.
“The increase in the trade deficit is also a sign that domestic demand exceeds the production capacity of the economy,” he added. “And that means the US economy is overheating.”