Biden Plays Stealth Stimulus Card With Student Debt Move

The Biden administration snuck some additional fiscal stimulus through the back door on Wednesday.

In what I’d suggest was a move designed to partially offset expected economic drag from the demise of Build Back Better, The White House extended a long-running moratorium on student loan repayments through May 1.

The extended relief applies to some 41 million borrowers who Biden described as needing additional “breathing room” during the ongoing “economic upheaval.”

He was careful not to undermine his own narrative about the strength and resilience of the recovery. “While our jobs recovery is one of the strongest ever… we know that millions of student loan borrowers are still coping with the impacts of the pandemic and need some more time before resuming payments,” Biden said, adding that he and Kamala Harris “care deeply about” the issue.

Invariably, media coverage will center mostly around the debate over student debt cancellation and whether the pandemic moratorium extensions are just delaying the inevitable. But I’d suggest the more germane point for market participants is the extent to which the move prevents or ameliorates a decline in spending that may have accompanied the resumption of loan payments at the end of January. According to the Department of Education, the pause will save borrowers $5 billion per month.

Joe Manchin’s decision to oppose Biden’s social spending plan means cash payments under Democrats’ refashioned child tax credits are set to expire. That means “all but the most affluent families,” to quote a good The New York Times piece out this week, will lose a source of monthly income.

As the linked article noted, citing a Census Bureau poll, “around half of the roughly 300,000 recipients surveyed reported using the money on food — an indication that the tax credit was helping to bring down hunger and food insufficiency.” The Times added that,

Many recipients also reported spending the funds on child care and school supplies. Interviews with four families revealed other day-to-day expenses they used the funds for — from doctor’s appointments to car repairs — and the joys of a little breathing room for households that may otherwise live paycheck to paycheck.

The four families interviewed for the article received between $600 and $1,650 in monthly credits. One family described the payments as “surreal and unbelievable.” That’s a sad testament to how far behind America is when it comes to providing for families. As The Times put it, America is “an outlier among developed countries.” Child subsidies are more norm than exception in advanced economies. What’s “surreal and unbelievable” is that more American families don’t demand lawmakers explain why the US is behind the curve.

Barring new legislation by the end of this year, the last of those payments already went out. Manchin, who opposed the extension, suggested the payments may contribute to drug abuse. A separate article in the Times noted that West Virginians “could be particularly devastat[ed]” by the cessation of the payments given poverty levels in the state.

Obviously, extending the student loan moratorium is no substitute for making the reimagined child tax credit permanent. But it could conceivably soften the blow at the margins. Otherwise, families would lose a stream of monthly income at the same time 40 million Americans were forced to resume payments on a portion of the nation’s $1.75 trillion in student loan debt (figure below).

Occasionally, I revisit the student debt forgiveness discussion in these pages. It’s a spirited debate, but I generally avoid the controversial issues in favor of a common sense assessment. The sum you see in the figure (above) is never going to be paid back. That’s the reality.

The only thing that pile of debt is “good” for is delaying household formation and serving as a drag on consumption. The portion owed to the government should be forgiven not in the name of generosity, not for the purposes of bolstering this or that president’s Progressive or populist bonafides, but rather in the name of economic expediency. Once that’s done, the federal government needs to immediately overhaul the system so that various perverse incentives don’t continue to feed on themselves, driving costs higher and creating another giant mountain of debt.

Someone will have the unenviable job of apologizing to all the parents who funded their children’s education and especially to all the students who worked to pay back their own loans. That apology will need to admit of no equivocation whatsoever. It’ll have to take the form of an outright admission that the situation isn’t fair and that it’s an affront to the concept of personal responsibility. With that apology on the table, whoever the president is at the time will need to explain that unfair though it may be, it’s necessary.

But that’s for another day. And probably for another president. Biden has pushed back on calls for debt forgiveness in excess of $10,000 and even on that sum, he wants Congress to make the call.

What’s important right now is the timing of Biden’s decision to extend the moratorium given controversy around the fate of the social spending plan. Consider the following brief bit of color from Goldman on the child tax credit:

The most important question for the near-term outlook is the fate of the expanded child tax credit. Sen. Manchin has already proposed adding work requirements on the credit, which could be done by making it only partly refundable, as it had been until 2021. In theory, congressional Democrats could finance a permanent extension of a partly- or non-refundable child tax credit at the current higher level with the revenue from the tax increases in the House-passed BBB; Manchin has not objected to those tax increases. However, it would likely take several weeks to negotiate a new compromise, and with the expanded child tax credit expiring, the urgency to extend it is likely to fade while any negotiations take place. It is also unclear whether Progressive Democrats would accept legislation that drops most of their other priorities. While we still think there is some chance that Congress extends the expanded child tax credit retroactively in some form, the odds of this happening seem to be less than even at this point.

Again, that matters. And it matters a lot. The last thing families need with inflation running the hottest in four decades is to lose a monthly stream of payments. The second-to-last thing Americans need is more bills. Of course, Republicans will argue that those payments are part of why inflation is so high in the first place, both because it artificially juices demand when supply can’t keep up, and because it may be keeping people out of work, thereby driving up competition for workers, chancing a wage-price spiral.

Whatever you believe, it’s the context that matters. That is, I think the proper way to conceptualize of Biden’s student debt moratorium extension is by reference to everything said above.

Earlier this week, after Manchin came out in opposition to Build Back Better, Alexandria Ocasio-Cortez told the nation that Biden isn’t doing everything he can to help families. She mentioned student loans. “The fact that Biden has the power to provide student debt relief to millions, had to be forced into extending the eviction moratorium and has yet to aggressively campaign against the filibuster shows us he has more power than he’s using,” she said. That was less than 72 hours ago.