How Biden’s latest student loan extension will impact inflation in 2022
Tens of millions of Americans received an early Christmas present on Wednesday when the Biden administration announced it would extend the moratorium on student loan repayments by 90 days, which was set to expire at the end of next month. The moratorium was first put in place in March 2020 as part of the Covid-19 response, and it had already been extended three times. The last time it was extended, in September, the Education Ministry said it would be the “final extension.” So I guess that’s the final final overtime.
The US government, after all, doesn’t need that extra $ 7 billion a month right now.
The obvious question, of course, is what has changed since September to justify maintaining the moratorium. And the answer is not enough – and that is precisely why the administration’s decision makes sense.
The extension means the more than 40 million student loan borrowers no longer have to pay hundreds, if not thousands, of monthly payments until May. This is obviously a huge advantage, especially since surveys suggest that a high percentage of them would have financial difficulty resuming repayments. Between inflation and the omicron, people have a lot to worry about right now. The extension removes a great source of anxiety.
But the extension will also benefit the economy as a whole. Even though the total amount of monthly loan repayments is, in the grand scheme of things, low (around $ 7 billion), deferral of these payments will help keep demand strong at a time when the economy is struggling to keep up. new headwinds.
Admittedly, the labor market is stronger than it was three months ago: unemployment has fallen from 4.8% to 4.2%, and the economy has created nearly 800,000 jobs. But the sharp rise in the inflation rate (which now stands at 6.8%) has eroded wage gains for most workers and shaken consumer confidence, and the economy is growing only at a respectable rate, but not growing. fast. More importantly, we are still in the midst of a pandemic that the White House (like most of us) was counting on us for at the moment, an issue that was only exacerbated by the arrival of the omicron variant. .
Some, like former Treasury Secretary Larry Summers, have suggested the extension is bad because it will help fuel inflation, rather than helping student loan borrowers cope with it. But the total amount of monthly loan repayments that are deferred is, in the grand scheme of things, small (around $ 7 billion), and all that money won’t be spent, so the deferral is unlikely to have much to do with it. impact on inflation at all.
This is all the more true given that the US economy is now facing headwinds that will likely reduce demand in the months to come. The Federal Reserve is now much more concerned about inflation than it used to be, which means monetary policy is likely to tighten in the future. Democrats’ failure, at least for now, to pass the Build Back Better bill not only means federal spending will be lower than forecast next year, but the enhanced child tax credit will expire. at the end of the month. The tax credit saved American families billions of dollars every month, savings that will now disappear.
Then there is omicron. This new variant isn’t going to put us back into fashion in March 2020 – or even January 2021 – especially emerging evidence suggests that it may well be milder than previous variants, and vaccines and new therapies are going to mitigate its impact. But already infecting millions of people, many of whom will take time off work (and pay) as a result. And we still don’t know if Omicron will have an impact on people’s willingness to do things like eat out. The moratorium was put in place as a pandemic measure. And, like it or not, the pandemic is still with us.
The Federal Reserve is now much more concerned about inflation than it used to be, which means monetary policy is likely to tighten in the future.
It is true that the loans will eventually have to be repaid, unless President Joe Biden decides to write off large chunks of student debt, as progressives have urged him to do. There is simply no reason for them to start paying off on February 1. The US government, after all, doesn’t need an extra $ 7 billion a month right now; he can borrow long term at exceptionally low rates if he wishes. Better to keep that money in the economy and give student loan borrowers four months to prepare to start repaying again, rather than just depositing it in the government bank account.
Of course, when the moratorium ends, it will reduce consumer demand. But the bite will be small, and the bet is that by May, Covid will be less of a problem, and economic uncertainty will have diminished. At this point, losing a few billion a month in consumer demand won’t matter much and the labor market will have experienced more than a year of full recovery. It’s fair to say that all of these expansions just kick the box off the road. But kicking the box is sometimes the right strategy, and when it comes to student loan payments, now is definitely one of those times.