Key Takeaways

• According to Forbes Advisor, canceling student loans will not be free, it will cost the federal government hundreds of billions of dollars which means that it is the general public who will end up footing the bill.

• This statement was echoed by many other people including Jason Furman, the Aetna Professor of the Practice of Economic Policy at Harvard, who said the forgiveness plan will not be free and that it will be paid for by “the 87% of Americans who do not benefit but lose out from inflation and future spending cuts & tax increases.”
• Other institutions such as the NTU Foundation estimate that the forgiveness program will cost taxpayers approximately $395 billion (a figure that is close to the estimates from Goldman Sachs, the Committee for a Responsible Federal Budget (CRFB), and the Cato Institute), with the average burden per taxpayer in the country being $2,503.22.

Introduction

Debt Forgiveness Cost

• Since the student loan forgiveness plan announcement, a number of groups have tried to approximate how much it will cost. According to the Committee for a Responsible Federal Budget (CRFB), over the next ten years, the plan will cost between $330 billion and $390 billion, with an average estimate of $360 billion. On the other hand, Goldman Sachs, Cato Institute, and the National Taxpayers Union (NTU) Foundation believe the plan will cost taxpayers approximately $400 billion, $427 billion, and $395 billion, respectively.

 

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• However, even though the White House will not have an official estimate of how much the plan will cost until later this winter, according to the New York Times, officials say that these outside estimates are far too high.

Debt Forgiveness Impact on Taxpayers

• According to Forbes Advisor, canceling student loans will not be free, it will cost the federal government hundreds of billions of dollars which means that it is the general public who will end up footing the bill.
• This statement was echoed by many other people including Jason Furman, the Aetna Professor of the Practice of Economic Policy at Harvard, who said the forgiveness plan will not be free and that it will be paid for by “the 87% of Americans who do not benefit but lose out from inflation and future spending cuts & tax increases.”
• Other institutions such as the NTU Foundation, Goldman Sachs, the CRFB, and the Cato Institute also believe that this plan will cost taxpayers. Therefore, if policymakers will indeed have to find ways to offset the total cost of the forgiveness through borrowing, increasing taxes, spending cuts, or a mixture of these strategies, then taxpayers will feel the heat.
• For instance, the NTU estimates that the forgiveness program will cost taxpayers approximately $395 billion (a figure that is close to the estimates from Goldman Sachs, the Committee for a Responsible Federal Budget (CRFB), and the Cato Institute), with the average burden per taxpayer in the country being $2,503.22.
• Moreover, according to NTU calculations, this burden will not be evenly distributed across different income levels. Some income levels will feel the impact more than others with taxpayers earning the highest incomes getting the short end of the stick. Based on NTU calculations this is how the average tax burden will be spread across different income levels;

• Taxpayers earning between $1 to $50,000 average burden: $190 
• Taxpayers earning between $50,000 and $75,000 average burden: $1,040 
• Taxpayers earning between $75,000 and $100,000 average burden: $1,774 
• Taxpayers earning between $100,000 and $200,000 average burden: $3,790 
• Taxpayers earning between $200,000 to $500,000 average burden: $11,940 

 

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Managing Deficit Without Burdening Taxpayers

• Although most believe that at the end of it all the taxpayer will be the one to foot the bill, it might be possible for the US government to cancel the student loans without affecting taxpayers. While sources such as the Wharton Budget Model estimate that the forgiveness plan will add around $519 billion to the federal deficit over the next decade, President Biden said at a recent press briefing that his government cut the deficit by more than $350 billion in 2021 and is on its way to cut it by more than $1.7 trillion by the end of 2022, and so there’s “plenty of deficit reduction to pay for the programs — cumulative deficit reduction — to pay for the programs many times over.”
• Since the canceled federal student loans will be added to the federal deficit, to better manage the increasing debt without increasing taxes, the government can implement some of the options that were recommended by the Congressional Budget Office on how to reduce the nation's deficit. Some of them include "reducing the size of the nuclear triad, canceling the long-range standoff weapon, reducing funding for international affairs programs, limiting states’ taxes on health care providers, and making the social security’s benefit structure more progressive".

Research Strategy

Key Takeaways

• President Joe Biden announced a 3-part student loan debt forgiveness plan on August 24, 2022, and the first part of the plan involves providing targeted debt relief to low- and middle-income families.
• The Department of Education will provide up to $10,000 in loan relief for individuals who earn less than $125,000 a year. Married couples or heads of households who make less than $250,000 a year also stand a chance to have up to $10,000 of their federal student loan debt forgiven.
• However, Pell Grant recipients who earn less than $125,000 (for individuals) or $250,000 (for the head of households or married couples) may have up to $20,000 of their federal student loan debt forgiven.

Introduction

Part 1 of the Plan: Targeted Debt Relief

• The first part of President Biden’s plan involves providing targeted debt relief to low- and middle-income families. The Department of Education will provide up to $10,000 in loan relief for individuals who earn less than $125,000 a year. Married couples or heads of households who make less than $250,000 a year also stand a chance to have up to $10,000 of their federal student loan debt forgiven.
• However, for Pell Grant recipients, the figure increases to $20,000 as many of them come from families that make less than $60,000 a year and face more challenges when it comes to debt repayment compared to other borrowers. According to the US Department of Education, approximately 66% of Pell Grant recipients come from families with annual incomes of $30,000 or less. Therefore, those of them who earn less than $125,000 (for individuals) or $250,000 (for the head of households or married couples) may have up to $20,000 of their federal student loan debt forgiven.

 

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• The targeted debt relief part of the plan is expected to help approximately 43 million borrowers across all age groups as 21%, 44%, and 35% of eligible borrowers are 25 years and under, 26-39, and 40 and above, respectively. The plan is also expected to advance racial equity by narrowing the racial wealth gap.
• Finally, the Department of Education estimates that 87% of the relief dollars will go to borrowers who earn less than $75,000 a year while the remaining 13% will go to those who earn between $75,000 to $125,000.

 

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Eligibility Criteria

• All federal student loan borrowers who earn less than $125,000 (for individuals) or $250,000 (for the head of households or married couples) per year are eligible for debt cancellation. This income limit is based on gross adjusted income from 2021 or 2020.
• Only loans that were disbursed by June 30, 2022, are eligible for this debt relief. Students who never graduated or used their federal student loans to pay for community college, a trade program, or other alternative certifications also qualify for this program.
• On the other hand, while private loans don’t qualify, federal parent and grad PLUS loans are eligible.
• According to Forbes Advisor, it is not clear whether borrowers with Federal Family Education loans (FFEL) and Perkins loans that aren’t held by the federal government will qualify for forgiveness. However, the article goes on to say that if the loans qualified for the federal student loan payment pause, then they might be eligible.
• The New York Times also reported that while FFEL loans that were not paused are not eligible for cancellation at the moment, one can consolidate them into a federal direct loan to make them eligible.
• Additionally, for FFEL loans that “weren't paused and are held by a private lender, the Department of Education is currently working with those third-parties to forgive borrowers’ debt—though this plan hasn’t been solidified yet.”
• Approximately 8 million borrowers will automatically receive their debt relief as the Department of Education already has their income. An application will also be made available by early October for borrowers to provide their income information. Borrowers who are not sure if the department has their income information already can also use it.
• While the Department of Education will continue taking applications until December 31, 2023, upon completing the application, a borrower can expect to receive their debt relief within 4-6 weeks.

 

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Part 2 of the Plan: Making the Loan System More Manageable

• In addition to targeted debt relief, the student loan forgiveness plan also wants to make the loan system more manageable to both current and future borrowers. For instance, the Department of Education is proposing a new income-driven repayment plan that will protect more low-income borrowers by capping the amount of monthly payments. The new system will reduce the amount borrowers have to pay from 10% to 5% of their discretionary income. If this is implemented, the average annual student loan payment for both current and future borrowers will decrease by approximately $1,000.
• The plan also seeks to fix the Public Service Loan Forgiveness (PSLF) program by dealing with “complex eligibility restrictions, historic implementation failures, and poor counseling given to borrowers” that have stood between public servants and their loan forgiveness for a while now.

Part 3 of the Plan: Protecting Borrowers and Taxpayers from Increasing College Costs

• While President Biden already signed the “largest increase to the maximum Pell Grant in over a decade and provided nearly $40 billion to colleges and universities through the American Rescue Plan,” he promises to continue the fight to double the maximum Pell Grant and have free community colleges to keep college costs in check.
• In an effort to ensure that graduates don’t leave school with mountains of debt they cannot repay, the Department of Education will also announce new actions that will hold colleges accountable, ensuring that they keep their prices reasonable.

Research Strategy