US Debt Forum Articles

Canceling Student Debt Isn’t Free. Here’s Who Pays For It

With President Joe Biden considering canceling up to $10,000 in federal student loans per borrower, a long sought after policy dream for millions of Americans who struggled with years of repayment could become a reality.

But student loan cancellation isn’t a magic wand that makes those loans disappear—they’ll have to be paid for somehow. But the question is: By whom?

 

Who Pays for Student Loan Debt Cancellation?

Canceling federal student loans will cost the federal government hundreds of billions of dollars— and it’s the general public that will eventually end up footing the bill.

Canceling up to $10,000 in federal student loans per borrower would cost the government roughly $245 billion, according to the Committee for a Responsible Federal Budget (CRFB). If income caps were implemented to limit forgiveness to folks with lower incomes, that would only drop the CRFB’s estimate to about $230 billion.

But what exactly does “cost the government” mean? Canceled federal student loans would be immediately added to the federal deficit, which measures how the country owes more money than it takes in during a year.

Analysts agree that canceling federal student loans would increase the deficit. But what they’re split on is how significant that addition would be, and how the government could eventually recoup the costs.

How Reducing the Deficit Can Eventually Fall on Consumers

Some express concerns about the negative effects that large amounts of national debt can have on the economy, including making it vulnerable to rising interest rates and increased inflation. But others claim that our government has run on a deficit every year since 2001 without many adverse effects, and we wouldn’t see much of an impact from canceling student loans.

The federal government had a $2.8 trillion deficit in fiscal year 2021, much of which was comprised of Covid-19 relief spending, including stimulus checks and emergency rental assistance. The deficit amounted to approximately 13% of GDP and accounted for the second largest deficit since the end of World War II.

To put that in perspective, deficits over the last five decades have averaged just 3% of GDP. The higher that percentage is, the less likely the country will be able to pay back its debt and is at a high risk of default—and default could cause mass panic in the global financial system. The CRFB’s estimate of student loan cancellation costing $230 billion would add less than 1% of the 2021 deficit overall.

A recent report by the U.S. Government Accountability Office (GAO) warns that current federal spending is at an unsustainable level and puts the country’s financial health at risk.

The government has two options to reduce the deficit: Decrease spending or raise taxes. That, according to some policy analysts, is how the cost will eventually make its way to the general public.

“There are trade-offs and it’s quite likely that if we spend this money on forgiving student loan debt we won’t spend it on other things we want to see the government do,” says Sandy Baun, nonresident senior fellow at the Urban Institute.

Spending cuts could potentially slash some of the most important social programs in the country. In 2020, the Congressional Budget Office (CBO) released a report of various strategies the federal government could use to lower its deficit. These included cutting down on vital programs, including eliminating free and reduced school lunches or raising the full retirement age for Social Security.

That means some of Biden’s social initiatives, like universal Pre-K or guaranteed parental leave, could have a tough time becoming law in the future.

Raising taxes to increase revenue could also have an impact. Not only could individual income tax rates be increased, but the CBO report suggested decreasing or repealing popular tax credits and deductions, including limiting deductions for charitable giving, as steps the government could take to increase revenues. President Biden has vowed to not raise taxes on the middle class, but what future administrations could do to rein in the deficit remains to be seen.

Those in favor of canceling federal student loans say that the people who will benefit the most from cancellation shouldn’t be the ones paying for it.

“We should increase taxes on corporations, high earners and the wealthy,” says Charlie Eaton, cofounder of the Higher Education, Race and the Economy (HERE) Lab at the University of California. “Those folks should pay more because they have benefitted from having a more educated workforce that produces the wealth that they have accumulated.”

There’s also the question of whether student loan cancellation will increase inflation. Some researchers take the stance that effectively giving consumers more money to spend, while the world reels from supply chain issues, will only push inflation up further. Others argue that half of student loan borrowers have a zero or negative net worth, and the extra money in their budget each month could go toward paying down their other debt.

Advocates Say Immediate Benefits of Canceling Student Loan Debt are More Important

Not everyone agrees that the long-term implications of increasing the deficit by forgiving federal student loans is worth worrying over. Student loan cancelation advocates argue that canceling debt now would immediately impact borrowers by putting more money in their pockets, and they say that’s more important than the federal deficit.

“It’s not that we don’t worry about the macroeconomic implications [of student loan debt forgiveness], ” says Cody Hounanian, executive director of the Student Debt Crisis Center, a nonprofit advocating for student loan debt cancellation. “I just prioritize what everyday Americans are needing at this moment.”

Canceling student loan debt could remove significant barriers keeping everyday Americans from achieving upward mobility. Research suggests that it could help consumers from less privileged backgrounds build wealth and address racial disparities by benefiting those who carry the biggest loan balances typically Black and Latinx consumers. Those benefits, for some, are worth any potential ramifications in the future.

“Canceling those debts is a way to right a set of wrongs that are highly unequal by race, by gender and by socioeconomic background,” says Eaton. “It’s well worth it.”

As of now, the White House says a decision on federal student loan cancellation will be made before the last payment pause ends on Aug. 31. If Biden chooses to forgive $10,000 in federal student loans per borrower, it’ll add hundreds of billions of dollars to the national deficit—and sooner or later the general public will have to foot the bill.

Kelly Anne Smith
Forbes Advisor Staff

Published: May 6, 2022, 2:38pm

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https://www.forbes.com/advisor/personal-finance/who-pays-for-student-loan-forgiveness/

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