Last week, the Biden administration unveiled a much-anticipated plan to forgive up to $10,000 in federal student loan debt owed by millions of Americans and as much as $20,000 for low-income borrowers. But the White House didn’t mention how President Biden’s decision to forgive student debt for some Americans will be paid off in the long-term. Administration officials didn’t explain how the additional spending will be made up or if it will increase tax bills even for average Americans. That said, many have been arguing in the past few days that the national deficit is actually already plunging under the watch of Biden.
Penn Wharton Budget Model, a group of economists and data scientists at the University of Pennsylvania who analyze public policies to assess their economic impact, estimated that forgiving the debt would cost Americans nearly $300 billion in the first year. While an analysis prepared by the National Taxpayers Union Foundation has estimated that student loans will cost the average American taxpayer more than $2,000, reported Fox News.
If student loans contribute almost $330 billion to the deficit over the next decade (as estimated by the University of Pennsylvania’s Wharton School of Business), taxpayers will face an average cost of $2,085. But the experts say that could be just the tip of the iceberg. “Some may dispute that taxpayers bear the cost of canceling student debt. But the $329 billion cost of student debt cancellation would be $329 billion previously borrowed from the federal government and not returning to the Treasury,” the analysis states. “Policymakers will need to make up for that gap in the future with government spending cuts, tax increases, more borrowing, or some combination thereof.”
This has the potential to create concerns about the fairness of the policy. The median household income in the United States in 2020 was about $67,500, according to the Federal Reserve Bank of St. Louis. At the same time, according to administration officials, no household or individual in the top 5 percent of earners is expected to benefit from the decision. “Using the authority Congress granted the Department of Education, we will forgive $10,000 in outstanding federal student loans,” Biden declared. “In addition, students who come from low-income families which allowed them to qualify to receive a Pell Grant will have their debt reduced $20,000.”
A pause on student loan repayments is also being extended by the White House through the end of the year. The Department of Education has also proposed capping undergraduate loan repayments at 5% of monthly income, which will increase taxpayers’ costs of aid. Loans obtained after June 30 of this year will not be eligible.
But the debate over student debt relief has revolved largely around its inflationary effects. On top of the nearly $31 trillion in existing US debt, the gift will also have to be paid for, which means taxpayers will likely be liable for much of the principal and interest. The gift is estimated to cost at least $300 billion with a top limit set as high as $600 billion.