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President Biden announced his his long-awaited student loan cancelation plan and an extension of the moratorium on payments Wednesday.
Biden was long expected to announce plans to forgive up to $10,000 in student debt for those making up to $125,000, which he did, but he threw in another provision – $20,000 of debt forgiveness for Pell Grant recipients. In addition, borrowers will not be required to pay back loans until January 2023, marking the fifth extension of the payment pause.
Pell Grants are usually not repaid unless a student drops out early or does not take the proper number of credits.
Here’s what the program will actually cost at minimum, based on models that did not factor in Pell Grant forgiveness:
One-time debt forgiveness of $10,000 per borrower making under $125,000 will cost about $300 billion. The cost increases to $330 billion if the program is continued over a standard 10-year budget window.
Disproportionately favors the well-off
Though the Biden administration plans to institute income caps to stave off criticisms that student loan forgiveness benefits the wealthy, between 69 and 73 percent of the debt forgiven accrues to households in the top 60 percent of the income distribution, according to a Penn Wharton analysis.
The Pell Grant provision, which forgives up to $20,000 in debt, is targeted toward lower-income borrowers who are eligible for such loans.
The middle and fourth quintile see a majority of the benefits from $10,000 debt forgiveness
President Biden announced his his long-awaited student loan cancelation plan and an extension of the moratorium on payments Wednesday
Could further bloat tuition costs
The analysis noted that some lower-income students could choose to attend universities they would not have been able to afford without debt forgiveness, thus making the program more progressive, while at the same time universities could benefit from debt forgiveness by further bloating their budgets and raising tuition cost.
The idea that easy student loans bloats tuition costs is not new – it was famously argued by President Reagan’s Secretary of Education William Bennet in 1987 in a New York Times op-ed, who wrote, ‘increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.’
Debt returns to the same level after four years
On a broader scale, $10,00 in debt forgiveness would do little to stave off the student loan crisis, even without income caps. Federal student loan borrowers currently hold about $1.6 trillion in debt.
Canceling $10,000 student debt without income caps would draw down the total amount of debt to $1.2 trillion. It would take only four years for federal student loan borrowers to owe the government a total of $1.6 trillion once again, according to an analysis by the Committee for a Responsible Federal Budget.
The reason is two-fold – first, borrowers would slow repayment of their outstanding debt – CRFB estimates that borrowers would repay $60 billion per year instead of $80 billion. And while borrowers are paying less back, their loans are still accruing interest. Secondly new borrowing would continue at at least the previous pace, but probably a faster one.
The Congressional Budget Office projects $84 billion will be borrowed this year with increases up to $108 billion in 2032.
In real dollars, accounting for inflation, equivalent debt levels would return after five years.
Costs at least $300 billion, or $2,000 for each taxpayer
If the program were a one-time cancelation, it would cost about $298 billion, according to the Penn analysis, meaning it would negate all of the ‘deficit reduction’ measures included in the Inflation Reduction Act (IRA)
Tax increases in the IRA were to reduce the deficit by about $300 billion over the next 10 years.
If the program spans over $10 years, it will cost the federal government another $3 billion to $4 billion annually and is estimated to cost $329 billion. Taking this cost and dividing it across the approximately 158 million taxpayers in 2019 leaves each taxpayer responsible for about $2,085.59.
Could exacerbate inflation
Roughly 6 in 10 Americans are concerned student loan forgiveness could make 40-year-high inflation worse, according to a new CNBC poll.
Obama economic advisor and Clinton Treasury Sec. Larry Summers issued a warning against debt cancelation on Monday.
‘I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief or micro economically by encouraging college tuition increases,’ Summers wrote on Twitter.
‘The worst idea would be a continuation of the current moratorium that benefits among others highly paid surgeons, lawyers and investment bankers,’ the Clinton-era Treasury secretary and Obama-era National Economic Council director.
‘Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college,’ Summers added.
‘Student loan debt relief is spending that raises demand and increases inflation. It 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.’
Inflation surged to a 40-year-high of 9.1 percent in June before falling back to 8.5 percent in July.