Forgiving $10,000 in student loan debt would cost the US $300 billion

If the Biden administration forgives $10,000 in federal student loan debt for borrowers within a certain income cap, it would cost approximately $300 billion, according to a new analysis.

No details of widespread student loan forgiveness have been officially released—and indeed, there is still a question as to whether President Joe Biden will actually cancel any debt at all.

Still, new reports indicate Biden is considering up to $10,000 in loan forgiveness for federal borrowers earning less than $125,000 per year, and the announcement could come as soon as Wednesday. A one-time, wide-spread federal loan cancellation (with an income cap) in 2022 would cost around $298 billion, the Penn Wharton Budget Model estimates.

If loan forgiveness is extended over the next decade, the cost would be an additional $3.5 billion a year for new eligible borrowers, or around $329 billion total (the vast majority of the debt would be forgiven in the first year). The estimate includes the 10-year window to give policymakers an idea of the additional cost for those who would just miss the cut-off if forgiveness was given this year, says Kent Smetters, faculty director for the Penn Wharton Budget Model.

The administration is reportedly considering an income cap to appease critics who say high earners do not need student loan debt forgiveness. Without the cap, $10,000 in forgiveness would cost an estimated $311 billion or $344 billion for 10 years of eligibility.

“The income cap is much less important than the amount of debt forgiven,” says Smetters.

Although $10,000 in forgiveness would be welcomed by many of the estimated 44 million federal borrowers, some progressives have pushed for greater relief, including up to $50,000 per borrower. Doing so would cost an around $980 billion over 10 years, Penn finds.

Forgiving $10,000 in debt per borrower would also disproportionately help wealthier households, according to the Penn analysis. Between 69% and 73% of the debt forgiven would belong to households in the top 60% of the income distribution. That said, with the reported income cap, the top 10% of households by income would receive less than 2.5% of the benefits.

Smetters says relative to other means-tested programs like the Supplemental Nutrition Assistance Program (SNAP) that help lower-income Americans by definition, federal student loan forgiveness would skew to higher earners.

“Who has student debt? In some cases it’s students who have separated from deferred status and don’t have a college degree,” he says. “But in many cases it’s those who have a college degree” and are higher earners as a result.

There are already existing programs to help low-income Americans get their federal loans forgiven, says Smetters, including income-driven repayment plans. The struggle is getting more people to enroll in them.

“A lot of people don’t realize there are already existing income based repayment plans,” he says. “On some of them you literally don’t have to pay back anything.”

An earlier report from the New York Federal Reserve found that $10,000 in forgiveness would completely wipe out the debt of nearly a third of borrowers, including about 31% of delinquent loans or those in default. 

The Biden administration has been debating whether to forgive $10,000 per borrower in student debt for several months.

It has already canceled $32 billion in total debt, the most forgiven by any president. That includes billions in relief for those who attended institutions that had predatory or misleading practices, to those who qualify for the Public Service Loan Forgiveness program, to disabled borrowers, and others.

Currently, federal student loan payments are still paused from the early days of the COVID-19 pandemic. The monthly bills will restart in September, unless Biden extends the pause as many progressives and other advocates want him to do.

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