Washington - President Joe Biden announcement on Wednesday that the U.S. government will forgive $10,000 in student loans for millions of debt-saddled former college students, was met with sceptism by some economists.

The move kept a pledge he made in Biden’s 2020 campaign for the White House, however some economists say it may fuel inflation and some Republicans in the U.S. Congress questioned whether the president had the legal authority to cancel the debt.

Debt forgiveness will free up hundreds of billions of dollars for new consumer spending that could be aimed at homebuying and other big-ticket expenses, according to economists who said this would add a new wrinkle to the country's inflation fight.

The actions are "for families that need them the most - working and middle class people hit especially hard during the pandemic," Biden said during remarks at the White House. He pledged no high-income households would benefit, addressing a central criticism of the plan.

Borrower balances have been frozen since the beginning of the COVID-19 outbreak, with no payments required on most federal student loans since March 2020.

The administration will extend a COVID-19 pandemic-linked pause on student loan repayment to year end, while forgiving $10,000 in student debt for single borrowers with annual income under $125,000 a year or married couples who earn less than $250,000, the White House said.

Some 8 million borrowers will be affected automatically, the Department of Education said; others need to apply for forgiveness.

Former U.S. Treasury secretary Larry Summers said on Twitter that debt relief "consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions."

Similarly Jason Furman, a Harvard professor who headed the Council of Economic Advisers during the Obama administration, said debt-cancellation would nullify the deflationary powers of the Inflation Reduction Act.

Moody's analytics chief economist Mark Zandi sided with the White House, saying the resumption of billions of dollars per month in student loan payments "will restrain growth and is disinflationary."
-Reuters