President Biden is again trying to cancel the student debt of 25 million borrowers after the Supreme Court killed his first attempt to do so last year. The new plan relies on a different legal rationale, which Biden officials hope will be better able to survive the inevitable legal challenges.
If the plan continues, the government will reduce the student loan balances of the majority of Americans who hold them from $5,000 to $20,000. For some, this will be the total amount of their loans. Economists expect that reducing the debt burden of millions of consumers will boost spending and economic growth (and possibly inflation).
But money is not free. Sure, it’s government money, which doesn’t seem entirely real, but by canceling debt payments, the government is foregoing future revenue, adding to annual deficits and total national debt. It is essentially future taxpayers who will foot the bill.
The Biden administration has not put a price tag on the latest plan, which is a collection of different loan forgiveness programs primarily targeting people who have been paying off their loans for 20 years or more. If all new programs hold up and forgiveness averages $5,000 per borrower, the shortfall would total about $125 billion over several years. This amount would total $500 billion if the average was $20,000 per borrower.
This matches the cost of the previous Biden plan that the Supreme Court struck down. In 2022, the Congressional Budget Office (CBO) estimated that Biden’s first student loan forgiveness program would cost the government $400 billion in lost revenue over 30 years. The new plan could involve less money because it affects fewer people, but the lost revenue could also accumulate over a shorter period because many of the loans eligible for the new program are close to being repaid.
In terms of the federal budget, $400 billion is both a pittance and a huge sum. As a percentage of the total national debt, this represents only 1.2%. Nothing burger. But if Congress tried to pass a $400 billion package of benefit enhancements or tax breaks, there would be a huge battle and declarations from one side or the other that it’s completely unaffordable. Bills of this magnitude are only passed in times of emergency such as COVID, or when one party controls all branches of government and has the power to ignore the other party.
For comparison, the Inflation Reduction Act of 2022 included measures that would reduce annual deficits by about $275 billion over a decade. Biden bragged about it at the time. But canceling student debt on the scale that Biden is currently advocating would essentially erase those savings.
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There is an important reason why Biden is trying to reduce student debt through regulatory and executive actions: Congress will not do it through legislation. Even when Biden’s Democrats controlled both houses of Congress during his first two years in office, there was no serious effort to pass legislation canceling student debt. The votes just weren’t there. Republicans will never support this idea, and even many Democrats recognize that there are better uses of taxpayer dollars than student debt relief.
In federal aid programs, the best value generally comes from programs that target those who need it most, such as young children from low-income families, working parents, or older workers struggling with health care costs. In contrast, student debt relief tends to benefit people with a college degree or some college education, who are typically in the top 60 percent of the national income distribution. There is no matching aid for high school graduates who chose not to go to college or for students who continued their education instead of taking on debt.
Another problem: Without corresponding reforms to the sprawling student debt program, loan forgiveness will essentially serve as a one-time windfall for a cohort lucky enough to fall within the qualifying parameters. This will not apply to future debts or debts that previous borrowers have already repaid. In an analysis of Biden’s first debt relief package, the Committee for a Responsible Federal Budget estimated that after a one-time cancellation of about $500 billion in debt, the total amount of outstanding debt student would return to the previous level of $1.6 trillion within five years. So what ? More debt relief, on an ongoing basis?
Still, Biden promised he would give student debt cancellation a chance during his 2020 campaign, and now that he’s running for re-election, he needs something to show for it. Republicans will attack Biden over the gift, with the Wall Street Journal editorial page describing Biden’s plan as a “lawless” effort “essentially turning college into a permanent, taxpayer-funded entitlement.”
The Republicans, for their part, are not the guarantors of budgetary probity either. They hope that if Donald Trump wins the presidency, he will cut corporate taxes and extend personal tax cuts that expire at the end of 2025 and will mainly benefit the wealthy. Everyone cares about the growing national debt, except when it interferes with what they need to do to get elected.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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