President Biden is again trying to forgive the student loan debt of up to 25 million borrowers after the Supreme Court struck down his first attempt to do so last year. The new plan relies on a different legal rationale that Biden officials hope will better weather inevitable legal challenges.
If the plan passes, the government will write down student loan balances by $5,000 to $20,000 for the majority of Americans who hold them. For some, this means having to repay the full amount of their loans. Economists expect that reduced debt burdens for millions of consumers will boost spending and economic growth (and possibly inflation).
But the money isn’t free. Sure, it’s government money that doesn’t seem entirely real, but by canceling debt payments the government is foregoing future revenue, increasing annual deficits and total national debt. Future taxpayers will essentially foot the bill.
All told, Biden’s debt relief plans will cost the government $559 billion in lost revenue over the next decade, according to an analysis by the Penn Wharton Budget Model. Biden is not proposing any new revenue to cover the costs, meaning he goes straight to the pile of what America owes its creditors.
As a share of the total national debt, $559 billion isn’t a lot – just 1.6% of all federal loans. But when viewed as a single program, $559 billion is a lot of money, even by Washington’s inflated standards. If Congress tried to pass a benefits package of this magnitude, there would be heated arguments and declarations from one side or the other that it was completely unaffordable. Packages of this size are only passed when there is an emergency like COVID or one party controls all branches of government and has the power to ignore the other party.
By 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 now Biden’s student debt relief will completely wipe out those savings and add an additional $284 billion in debt.
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There’s a big reason Biden is trying to reduce student debt through regulatory and executive actions: Congress won’t do it through legislation. Even when Biden’s Democrats controlled both chambers of Congress during his first two years in office, there was no serious effort to pass legislation to cancel student debt. The voices just weren’t there. Republicans will never agree to this idea, and even many Democrats admit that taxpayer dollars can be put to better use than canceling student debt.
When it comes to federal assistance programs, the best value for money tends to come from programs that target those who need it most, such as young children in low-income families, working parents, or older workers struggling to cope with health care costs have to fight. In contrast, student debt relief tends to benefit people with a college degree or college education, who typically fall into the top 60% of the national income distribution. There is no equivalent support for high school seniors who chose not to go to college or for students who worked their way through college rather than taking on debt.
Another problem: Without appropriate reforms to the sprawling student debt program, loan cancellation will essentially be a one-time windfall for a cohort lucky enough to meet the qualification parameters. It does not apply to future debts or to debts that previous borrowers have already repaid.
In an analysis of Biden’s first debt relief program, the Committee for a Responsible Federal Budget estimated that after a one-time cancellation of about $500 billion, the total amount of outstanding student debt would return to the previous level of $1.6 trillion within 20 years would 5 years. What then? More debt relief, ongoing?
Still, Biden promised during the 2020 campaign that he would try student debt relief, and now that he’s running for reelection, he has something to show for it. Republicans will attack Biden over the giveaway, and the dusty Wall Street Journal editorial page describes Biden’s plan as a “lawless” attempt to “essentially turn college into a perpetual, taxpayer-funded entitlement.”
Republicans, for their part, are not stewards of fiscal probity either. They hope that if Donald Trump wins the presidency, he will cut corporate taxes and extend individual tax cuts that expire at the end of 2025 and primarily benefit the rich. Everyone cares about the exploding national debt unless it affects voting options.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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