Student debt relief is a tourniquet — not a magic bullet

New York(CNN Business) All right, folks, it's finally here: President Joe Biden rolled out a long-awaited student-debt relief plan just a few days before a freeze on loan repayments was set to expire.

Let's break down what's in it, and why it's such a tricky political and economic issue. First, the basics:

• The plan cancels up to $10,000 in student loans for borrowers who earn less than $125,000 a year, or for couples making less than $250,000 a year.
• The pandemic-era freeze on repayments, due to expire at the end of this month, was extended through the end of 2022.
• People who received Pell Grants — the standard federal subsidy awarded to low-income undergrads — are eligible for total forgiveness of up to $20,000 (once again, that's only if they are under the $125K individual income level).

If you're a borrower closing in on your last 10 grand of payments, this is your hallelujah-God-bless-America-break-out-the-bubbly moment. Savor it.

But the move may not be the slam dunk the Biden administration was hoping for.

Certainly, there's a political upside. Three months out from the midterms, this gives Democrats $10K of debt relief to hang their hats on as they appeal to college-educated voters.

Biden can also boast that he's canceled the most student debt of any president.

Buuuut, it's also taken a full year of internal White House debate to get us here — leaving borrowers in the dark about whether and when they'll have to resume payments.

"The back-and-forth is just another layer making it hard for borrowers to prepare their wallets for payments," said Bankrate analyst Sarah Foster, noting Wednesday's move is the seventh extension since President Trump first placed federal student loans in forbearance at the beginning of the pandemic.

WHAT ABOUT INFLATION?

Now let's talk Econ 101, aka the class you paid thousands of dollars to sleep through freshman year.

No surprise here, the debate around debt forgiveness has been focused on what it means for inflation, which is stubbornly hovering around 40-year highs and threatening to tip the US economy into recession.

It's important to note that Biden's plan is very much a compromise. Republicans want no debt forgiveness. Some Democrats want lots. So we're getting just a bit of relief.

There's about $1.6 trillion in student debt in the US, and making that all go poof overnight would give all borrowers more money to spend, driving inflation even higher.

Now, we can argue about the morality of the system all day, but it doesn't take an econ degree to know that in an economy struggling with inflation, a cash infusion — especially for rich people who may still have student debt but can afford to pay for it — is counterproductive. Such a move would drive up demand without boosting supply. Prices would have nowhere to go but up.

But because the Biden plan is limited to $10,000 for people making less than $125,000 a year, the effect on inflation, at least in the near term, should be negligible, some economists say.

"The end of the moratorium will weigh on growth and inflation, while the debt forgiveness will support growth and inflation," Moody's Analytics chief economist Mark Zandi told my colleague Matt Egan. "The net of these cross-currents is largely a wash."

Not everyone agrees. Jason Furman, a Harvard professor and former top economic adviser to President Obama, fired off a series of critical tweets Wednesday.

"Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse."

MY TWO CENTS

I'm all for making everyone's lives easier. But there are some bigger, trickier long-term effects to worry about as well.

Let's pretend, just for a minute, that the government canceled all student debt across the board. All $1.6 trillion, wiped clean.

Party time, right?

Well, maybe. But then you're still left the root of the problem, which is a gnarly root indeed: College tuition is too dang expensive. And Corporate America still treats a bachelor's degree as some kind of magic key to employability, even though — let's be honest — pretty much anyone with the right financing can spend four years writing crappy essays on 18th Century English poetry in between semi-weekly benders and walk away with a bachelor's degree. That shouldn't make me that hypothetical English major more qualified to join the professional workforce than, say, someone who spent four years bartending and learning how to pay bills, but that's the way the system works.

So, if the government is going to keep forgiving debt, universities are going to keep raising prices. Students will keep borrowing. No one in the business world will have any motivation to rethink the bachelor requirement. Ultimately, someone has to pay for all that schooling, and that'll fall to all taxpayers, regardless of whether they chose to spend eight semesters unironically arguing about Heidegger and Derrida in dimly lit coffee shops.

NUMBER OF THE DAY: $75 MILLION

A $75 million superyacht linked to a Russian billionaire was auctioned on Tuesday in Gibraltar, in what Reuters said is the first sale of its kind since Moscow ordered troops into Ukraine six months ago.

The yacht, Axioma, was impounded by Gibraltar authorities this spring after JPMorgan Chase said the yacht's apparent owner, Dmitry Pumpyansky, had reneged on the terms of a $20 million loan.

More than 60 bids came in for the 72.5-meter vessel, which sleeps 12 people and has its own swimming pool, spa, 3D movie theater, and water sports equipment.

WONKS, ASSEMBLE

All week, Wall Street has been preoccupied with an annual confab known as Jackson Hole.

Formally, that's the Federal Reserve Bank of Kansas City's Economic Policy Symposium, which is held over three days in the mountain town of Jackson Hole, Wyoming.

It's kind of a nerdier Rocky Mountain version of Davos, if you will.

Anyway, there'll be plenty of big brains making big speeches but there is one headliner whose every word and gesture will be parsed ad nauseam by traders, analysts and, well, pretty much every econ reporter on the planet. That headliner of course is the one and only chairman of the Federal Reserve, the Silver Fox himself, Jerome Hayden Powell.

These Jackson Hole speeches tend to be "much meatier than the usual policy speech," Kenneth Kuttner, an economics professor at Williams College, told my colleague Martha C. White.

So, what will Jay Powell say and what will markets do? Lord knows. But it's clear Wall Street is hungry for reassurance. They want the Fed to fight inflation, then back off immediately. Be hawkish, but not too hawkish.

"I think what Powell is going to try and do is continue his narrative on fighting inflation while trying to dissuade the market from the notion that the Fed has made a dovish pivot," said David Norris, partner and head of US credit at TwentyFour Asset Management. "I don't think he's going to surprise the markets by his statements."

(Side note: Imagine being so powerful that, like, the whole stock market moves not only on what you say but how you say it. Phew.)

Powell is typically measured and deliberate in every speech. The man is honestly unflappable. And this year he may be even more measured, considering how badly one comment from last year's summit has aged. That's of course when Jay Money told the Jackson Hole crowd that the central bank expects the effects of inflation to be — all together now — transitory.

Oof.

"Maybe this time it's going to be making a call on the likelihood of a recession," Kuttner said. "I think he almost has to say there won't be [one]. There's a good chance he's going to be wrong on that."

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