US Cancels Up to 27 Million KRW in Student Loans Per Person Ahead of Elections... Will It Fuel Inflation?

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] U.S. President Joe Biden has announced a plan to forgive up to $20,000 (approximately 27 million KRW) in student loan debt per person ahead of the midterm elections this November. This unprecedented measure will benefit about 43 million people. However, criticism is growing that it could encourage moral hazard and fuel inflation.

President Biden announced this student loan forgiveness plan during a White House speech on the 24th (local time), saying, "This means that people can finally start to break free from the mountain of debt." Under the plan, those earning less than $125,000 annually will have $10,000 of their debt forgiven, and those who received federal Pell Grants for low-income students will have up to $20,000 forgiven.

This is an unusual debt relief measure issued ahead of the expiration of the student loan repayment moratorium on the 31st. To qualify for the $10,000 forgiveness, individuals must have an annual income of $125,000 or less, or $250,000 or less for couples. Additionally, only those who took out federal student loans are eligible. The White House explained that "households in the top 5% income bracket are excluded."

Furthermore, the Biden administration will forgive up to $20,000 of debt for those who received the federal Pell Grant, a scholarship program designed to help low-income families with annual incomes under $30,000 attend college. Approximately 6 million people benefit from the Pell Grant program.

Along with this, the Biden administration has decided to extend the student loan repayment moratorium, which began during the COVID-19 pandemic, until the end of the year. This marks the seventh extension.

In recent years, student loan debt has become a serious social issue in the U.S. Students unable to cover expensive tuition fees have resorted to high-interest private loans exceeding 10%, and as interest burdens grow, some have given up on repayment altogether, becoming credit delinquents.

According to the Federal Reserve Bank of New York, as of the end of June, the outstanding student loan balance was $1.59 trillion, an 18% increase compared to five years ago. The White House confirmed that the current total U.S. student loan debt stands at $1.75 trillion, of which $1.6 trillion comes from federal loan programs.

The New York Times (NYT) reported, "Across the U.S., 45 million people carry debt from federal student loans," adding, "This is the largest consumer debt category after auto loans, credit card debt, and mortgages."

The number of beneficiaries of this measure is estimated to be around 43 million. The White House expects that 20 million of them will be completely relieved from the burden of student loan repayment. Additionally, about 90% of the forgiven amount is expected to benefit those earning less than $75,000 annually.

However, criticism that this is a populist policy aimed at winning young voters ahead of the midterm elections is inevitable. Senate Minority Leader Mitch McConnell of the Republican Party called this policy "student loan socialism," condemning it as an insult to those who saved to attend college, those who have fully repaid their loans, and those who joined the military to pay for education.

Concerns have also been raised that this could further fuel soaring inflation. Even progressive scholars such as Harvard Professor Jason Furman, who was in charge of economic policy in former President Barack Obama's camp, and former Treasury Secretary Larry Summers have warned that this measure could lead to tax increases and inflation. Summers previously stated, "Injecting additional funds for student loan forgiveness is an irrational and excessive measure that fuels inflation."

If the current inflation, the highest in 40 years, persists long-term, it could become a negative factor that intensifies criticism of President Biden's responsibility for inflation. However, the White House drew a line, stating that the impact of this measure on the Consumer Price Index (CPI) would be minimal.

There is also some resistance within the ruling Democratic Party. Some argue that the repayment burden should be reduced more significantly. The current forgiveness amount falls far short of the $50,000 per person initially advocated by the Democrats. Student loan forgiveness was a campaign promise of President Biden.

The Wall Street Journal (WSJ) noted that President Biden implemented this measure through an executive order rather than congressional legislation, suggesting that it could lead to legal disputes in the future.

This content was produced with the assistance of AI translation services.