By Ben Kaufman | April 21, 2022
A new, puzzling argument has swept the policy sphere, putting students at risk: that the current student loan payment pause is driving inflation. While this line has been parroted in the opinion sections of mainstream news outlets, it’s empirically unfounded.
Here’s the data:
Independent analysts have estimated that each full-year moratorium on student debt adds only “about 0.2 percentage points to inflation,” and White House projections are even lower. For reference, that means that of the 8.5 percent annualized inflation America saw in March, only 0.2 of those percentage-points were likely attributable to the student loan payment pause. The remaining 8.3 percentage points—equal to more than 97 percent of annualized inflation in March—were attributable to other factors, including the effects of the lingering COVID-19 pandemic, the war now happening in eastern Europe, and the consequences these dual catastrophes have had for supply chains and gas prices.
Further, while pundits warn of newly cash-flush student loan borrowers flooding consumer markets and driving up prices, the “excess” savings Americans have enjoyed from the payment pause simply haven’t been on the scale necessary to add much to inflationary pressures.
In particular, the Department of Education estimates that the payment pause returns $7 billion a month to borrowers’ pockets, or $84 billion per year. For borrowers, that is life changing money that has offered millions the opportunity to experience a debt-free existence for the first time in adulthood. Moreover, research from the University of California’s California Policy Lab and Student Loan Law Initiative shows that savings associated with the payment pause have had the most positive effects on borrowers who entered the pandemic with the weakest credit.
But these savings are tiny on the scale of the American economy. Data from the Bureau of Economic Analysis show that annual household spending in the U.S. runs into the tens of trillions of dollars, amounting to more than $16 trillion for 2021. The $84 billion sum that borrowers have pocketed each year during COVID is hardly a drop in the bucket compared to that level of aggregate consumption, representing only half of a percent of overall yearly spending. Plus, borrowers used substantial portions of the cash they retained through the payment pause not to fund new outlays such as “ballet lessons and new couches”—as one New York Times author put it—but rather to pay off other debts like credit card balances.
The “Very Serious Policy People” Need to Come Back to Reality
Misrepresentations around the relationship between student debt and inflation might not be so galling if they weren’t just the latest move in the DC commentariat’s long-standing war against relief for student loan borrowers. Opponents of debt relief have cycled through contradictory arguments during COVID, first stating that interventions on behalf of student loan borrowers would be insufficiently stimulative and are not suitably targeted, then claiming that the economy is too overheated for debt relief to be appropriate and that the payment pause is too narrowly targeted.
It’s time to stop listening to professional take-havers and start listening to the public. A decisive majority of Americans supported an extension of the pause on student loan payments, including a majority of voters who have no student debt at all. If those who regularly argue that Democrats should simply do popular things actually mean it, they should follow their own advice in this case too.
Plus, to the extent that those who connect the payment pause to inflation claim that policymakers should prioritize reducing demand, these commentators should be held accountable for the reality that “reducing demand” in this context means pushing low-income people, Black and Brown borrowers, and women into financial hardship. Student loan borrowers in these groups are far more likely to struggle with their student loan bills and consistently have substantially higher rates of delinquency and default. Reducing demand by ending the payment pause means telling these borrowers to once again begin choosing between their student loan bills and basic necessities such as food, clothing, and housing. For many, this choice will be the first step on the path to default, an outcome that will generate massive costs across their financial life and harm their ability to find a job, rent a home, or maintain a professional license.
Gasoline is hitting all-time record prices, “chaos” continues to reign across supply chains, and the return of war in Europe has injected massive uncertainty about the availability of basic commodities. These are all reasons to broaden student loan relief, not to limit it.
In the meantime, those who fancy themselves Very Serious Policy People should come to terms with the fact that the student loan payment pause is far down in the list of things contributing to inflation—and that the pause’s end should be comparably far down the list of actions that the Biden administration takes to combat rising prices.
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Ben Kaufman is the Director of Research & Investigations at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked on issues related to student lending.