As the debate over student loan forgiveness continues, many students and graduates are hopeful that sweeping relief will be on the horizon. Proponents argue that it would provide economic relief to millions of Americans, bolstering spending power and allowing borrowers to focus on building wealth rather than paying off debt. However, the potential downside of student loan forgiveness cannot be ignored—especially when considering its impact on inflation and the national debt.

At its core, large-scale student loan forgiveness functions as an inflationary tax, transferring costs to the broader public while driving inflationary pressures. Here’s why:

A Surge in Demand

The immediate consequence of forgiving student loans is that borrowers will suddenly have more disposable income. Rather than making monthly payments, individuals will have extra money to spend on goods and services. While this might sound like a positive economic stimulus, the increased spending could lead to demand-pull inflation. When too much money chases too few goods, prices rise, creating inflationary pressures across the economy.

In a post-pandemic environment where inflation is already mounting, this influx of spending could exacerbate existing problems, particularly in sectors like housing and healthcare, where prices are already elevated. Borrowers will have more freedom to spend, but as demand increases, so too will prices for everyone—not just those whose loans were forgiven.

Government Borrowing and Debt Financing

Another critical factor in the inflationary impact of student loan forgiveness is how the government will pay for it. The forgiveness programs currently on the table are estimated to cost hundreds of billions of dollars. If the government finances this by increasing its borrowing, it will add significantly to the national debt. As of 2024, the national debt already exceeds $33 trillion.

Increased borrowing doesn’t inherently cause inflation, but it can have ripple effects. When the government competes with the private sector for loans, it can drive up interest rates. Higher interest rates, in turn, slow down economic growth and could ultimately lead to a crowding-out effect, where businesses and individuals face higher borrowing costs, reducing investment and consumption. This scenario may temporarily limit inflation, but the longer-term economic drag could still result in price hikes as businesses pass on higher costs to consumers.

If the government finances student loan forgiveness through direct money creation or by issuing new bonds, it increases the risk of monetary inflation. While less likely, this option would add to the money supply and could contribute to inflationary pressures. Historically, increasing the money supply without a corresponding increase in goods and services leads to higher prices.

Taxpayers Footing the Bill

Perhaps the most insidious aspect of student loan forgiveness is that, while it is often framed as “relief” for borrowers, the cost must be borne by someone. If the national debt rises as a result of loan forgiveness, future generations will face the burden of servicing that debt through higher taxes or cuts to public services. In this sense, student loan forgiveness functions as a tax on those who do not directly benefit from it, particularly non-borrowers and individuals who have already paid off their loans.

In essence, student loan forgiveness transfers wealth from the general public—through inflation and increased government debt—back to a select group of borrowers. This indirect taxation occurs as higher prices erode the purchasing power of everyday Americans, and as future taxes increase to pay off the growing debt burden. This is why many critics argue that student loan forgiveness is not simply an economic stimulus, but an inflationary tax that shifts the cost to the broader public.

Conclusion

In an environment where inflation is already outpacing wage growth, adding more spending power through debt forgiveness could make the situation worse, pushing up the cost of living across the board.

Student loan forgiveness, while a compelling solution for many borrowers, carries hidden costs that could affect everyone. By increasing demand and adding to the national debt, forgiveness programs risk driving inflation higher and acting as an indirect tax on those who do not benefit directly from the relief. For this reason, it is essential to consider the broader economic consequences before enacting large-scale forgiveness, lest we create a situation where the cure for student debt becomes an inflationary burden on the entire economy.

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By Luke Hartlaub

The-Examiner Editor

Featured image courtesy of The Bury Post