April 2022 Q&A

Inflation, Student Loan Forgiveness, and More

You asked, I answered. I’ll send out an email asking for your May 2022 questions in a week or two, but feel free to send them now as a reply to this.

Would forgiving student loans make inflation worse, stimulate the economy, both, or neither?

The answer in the short-term is both. Forgiving student debt is equivalent to a stimulus package for impacted households. Spending on goods and services would go up. That stimulates the economy, driving inflation higher.

In the long-term, such forgiveness will hurt economic growth. If the taxpayer, who has financed these loans, doesn’t get paid back, they will be less willing to support future lending. That’s not good for economic growth. Such policymaking also seems unfair to those who paid back their student loans or who are doing so, and it creates a perverse incentive to not pay back loans even for those who are capable of doing so. Perhaps a bigger problem is that forgiveness doesn’t solve the underlying issue of loans being offered (and taken) for investments that don’t appear to have an adequate return.

[To be clear, I don’t have anything against people who would benefit from forgiveness or who want it for their own sake. It reminds me of how we Marylanders feel about the SALT deduction cap—bad policy, but would make us better off.]

Another reason that I generally don’t support student loan forgiveness (unless under extraordinarily compelling circumstances) is that such policymaking is extremely regressive (i.e., it disproportionately helps the wealthy). A typical college graduate with a bachelor’s degree earns about $1 million more than a high school graduate over the course of a career. The current unemployment rate for people who went to college but didn’t finish is 3%, while the unemployment rate for people with a bachelor’s degree is an even more astoundingly low 2%.

A Brookings Institute analysis (of Senator Warren’s more generous proposed plan) from 2020 found that 27% of the benefit of debt forgiveness would go to households in the highest income quintile, while 38% would go to households in the second highest income quintile. That means that 34% of the benefit would go to the 60% of Americans with the lowest incomes.

Please note that the share of borrowing that goes toward graduate school has increased. The 2020-21 school year represented the first time that graduate students borrowed as much as undergraduates. A lot of this incurred debt pertains to budding doctors and lawyers, occupations that pay well enough that forgiveness isn’t generally necessary. Second, much of this debt is incurred on behalf of master’s programs at elite universities that seem to exist for the sole purpose of funding PhD programs.

UPDATE FROM ZACK: According to this Washington Post article (that came out after Anirban responded to the question), the White House will forgive at least $10,000 to “people who earned less than $125,000 or $150,000 as individual filers the previous year.” That’s more than ten times higher than the Federal poverty line and about 2x the national median household income (as of 2020), and the median American who didn’t attend college earns less than $45,000 a year.

Do you think rural counties can [economically] recover more quickly from the pandemic? Can broadband tip the scales?

I think rural areas enjoy much-improved outlooks relative to the pre-pandemic period. Thanks to social distancing, the e-commerce boom, remote work, and other behavioral changes rendered by the public health crisis, many Americans decided that big, expensive cities are no longer for them. America is about to invest billions in rural broadband, and farms are benefitting from higher prices (though of course costs are up, too).

I think what you’ll see gong forward is less brain drain from rural areas, more opportunities for entrepreneurship, and more stable population. As a final note, President Biden’s American Rescue Plan (signed 3/11/21) also provides additional support for healthcare access in rural communities, which if nothing else should represent a large quality of life improvement.

With interest rates on the rise, how do we possibly avoid a recession?