Center for American Progress

Canceling at Least $10,000 of Student Loan Debt Will Help Lower the Cost of Living
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Canceling at Least $10,000 of Student Loan Debt Will Help Lower the Cost of Living

Canceling student loans offers targeted relief crucial to helping households improve their financial security—it is not a decisive factor in battling inflation.

Photo shows a view of the White House.
The White House is viewed in August 2022 in Washington, D.C. (Getty/Kent Nishimura/Los Angeles Times )

Commentary has been increasingly focused on whether student debt cancellation will exacerbate inflation. However, inflation is not the lens one should use to analyze the student debt crisis. The student debt crisis predates current inflationary pressures and is part of a decades-long affordability struggle challenging the 43 million Americans who are student loan borrowers as well as their households. The costs of student loan debt have been increasing faster than income for years as the volume of student loan debt has grown from around $750 billion to $1.6 trillion since 2010. Targeted student debt cancellation of at least $10,000 will help millions of Americans better manage their budgets, build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility.

The impact of student debt cancellation on inflation

The Biden administration has already taken important steps in helping households with inflation and the broader cost-of-living crisis—including through the recent passage of the Inflation Reduction Act—which will reduce the costs of essentials, such as prescription drugs, invest in domestic production, and crack down on tax cheats. Targeted student debt cancellation is an important next step in this battle and is one thing the president can easily do to help millions of Americans make ends meet. It is important that President Joe Biden uses this moment to work to make college more affordable, which includes starting with student debt cancellation of at least $10,000.

Discussions of the impacts of student debt cancellation on inflation come at a time when countries all around the world are dealing with inflationary pressure. In the United States, last month’s inflation data showed that inflation is already cooling, and consumers expect inflation to decline. Since last month’s data was collected, gas prices—a large driver of recent inflation—have further decreased suggesting that inflation will continue to come down. Policy responses to the cost-of-living crisis should help those struggling to make ends meet, including student debt holders.

A Committee for a Responsible Federal Budget (CRFB) analysis intended to show the inflationary impact of student loan cancellation of $10,000, in fact, demonstrates that such cancellation would have a marginal impact on price changes, particularly because some of this debt would have already been forgiven. For this reason—relative to the Federal Reserve’s inflation target—the impacts on inflation of student debt cancellation of $10,000 are minor. Regardless, by CRFB’s own accounts, the marginal impacts on inflation from this partial student debt cancellation will be more than outweighed by the disinflationary impacts that arise when the current payment moratorium is eventually lifted (even if there is another temporary extension beyond August 31, 2022).

Moody’s Analytics finds that targeted student debt cancellation—when pursued with a restart in loan repayments at some stage—is disinflationary. Furthermore, the Roosevelt Institute also argues that canceling student debt would not be inflationary, particularly because higher wealth is unlikely to drive spending. Nonetheless, even economists hyper focused on inflation have concluded that canceling student loans is not a decisive factor in battling inflation. In fact, any marginal impacts on inflation from targeted student debt cancellation—which will be offset when student loan repayments eventually recommence —should not be an excuse to forgo pursuing a critical measure that helps millions of Americans. While the current inflationary crisis is impacting low- and middle-income families, student debt was inhibiting households long before.

Student debt cancellation will also help households with cost of living

Student debt affects millions of Americans and acts as a weight that limits financial security. Oftentimes it is low- and middle-income earners who are the bearers of this weight. Student debt cancellation of $10,000 is important for the one-third of Americans with debt—particularly the 15 million borrowers who would see their entire debt eliminated. Furthermore, due to well-documented racial disparities in income, home ownership, and wealth accumulation, more Black people must rely on debt to finance their college education than their white peers; have larger amounts of loans; and are more likely to take longer to pay off their loans. This means that Black borrowers will disproportionately benefit from student debt cancellation of $10,000, which would help close the racial wealth gap.

Student debt cancellation would help alleviate this burden and help families pay down other debt as well. A recent CNBC survey found that more than half of respondents would pay off other loans if student loans were canceled, and 45 percent would save for retirement. In the end, student loan cancellation will make it easier for households to manage their budgets and save for their future. Simply, their immediate and future financial security will improve.

Conclusion

Student loans started as a way to help lower- and middle-income American families finance part of the cost of college. But today, a tool meant to help individuals secure a brighter future has instead, too often, morphed into years of default and financial struggle for many borrowers and their households—and student loan debt is rising at an insurmountable rate. The Center for American Progress has previously called on the Biden administration to cancel at least $10,000 in student debt. As the administration has made lowering costs for families their number one priority, targeted student loan cancellation is a critical next step.

The authors would like to thank Lily Roberts, Jared Bass, and Christian Weller for their helpful feedback.

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Authors

Rose Khattar

Associate Director, Economic Analysis

Zahir Rasheed

Research and Press Assistant

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