Update: On Wednesday, the Biden administration confirmed $10,000 in debt relief per borrower subject to income, with additional relief for Pell Grant recipients. The payment moratorium will be extended through year-end.
If you’re wondering how much it would cost for the US to cancel $10,000 in student debt contingent upon borrower incomes not exceeding $125,000, the answer is almost $330 billion over a 10-year budget window.
That’s according to estimates from Penn Wharton, released on Tuesday. The payment moratorium established during the pandemic is set to expire this month, and with the midterms looming, the Biden administration is under immense pressure to deliver (or not) on what I think it’s fair to describe as a tacit campaign trail promise to forgive at least some student loans.
In a (for now far-fetched) scenario where Progressives succeeded in securing across-the-board debt relief of $50,000 per borrower, the 10-year cost would run to nearly $1 trillion, according to the Wharton model. It’d cost more than $800 billion in the first year. The figure (below) illustrates the various scenarios.
In orange is the year-one cost of $10,000 in relief for borrowers making less than $125,000. The purple box shows that cost over the course of the budget window. The figure in red is the all-in, 10-year estimate for no-questions-asked, $50,000 relief.
“New borrowers become eligible over the subsequent years of the budget window [and] those costs are substantially smaller since each borrower can have their debt forgiven up to the amount shown in column 2 over their lifetime,” Penn explained. So, essentially, the cost of the program widely seen as favored by the Biden administration would be around $300 billion initially, and then $3.5 billion per year after that.
The estimated distributional effects are — how should I put this? — mixed. Under no scenario does more than 12% of the financial benefit accrue to the bottom income quintile. The optimal scenario is (not coincidentally), $10,000 in relief with a $125,000 income cap. That would maximize the combined benefit for the bottom and second income quintiles, shown with bars in the figure (below) for simplicity.
Amusingly (and remember, I’m allowed to laugh at this because I lean Progressive, so I’m effectively laughing at myself), the worst outcome results from no-questions-asked, $50,000 forgiveness. In that scenario, almost 3% of the benefits would go to the top 5% of earners, and 8% to the top 10%. That’s not surprising. Those earning more than $150,000 per year are more likely to have jobs requiring expensive, advanced degrees.
Note that using Penn’s estimate for the year-one cost of $50,000 in relief with no income cap, the 2.43% of benefits which would accrue to borrowers in the top 5% of earners equates to nearly $20 billion.
Crucially (and unfortunately) more than two-thirds of the debt relief accrues to borrowers in the top 60% of the income distribution in all scenarios. The distributional outcome doesn’t change if you control for so-called “lifecycle effects” by limiting the analysis to borrowers aged 25 to 35.
All of the above is intuitive. A college degree is associated with higher incomes, so those in the lowest income brackets are less likely to have degrees, less likely to have student debt and therefore less likely to benefit from debt cancelation. Still, this simple analysis appears to suggest that one way or another, more than a quarter of the benefits of student debt relief would accrue to borrowers making between $83,000 and $141,000 per year. To call that suboptimal would be to materially understate the case.
Of course, there’s (much) more to it than what’s captured in this study. A lot depends, for example, on how large a given borrower’s debt burden is. Forgiving $10,000 in student debt for someone making $120,000 per year and currently servicing a $15,000 student loan makes no sense whatsoever. That’s pure stimulus. Add a zero (i.e., assume the debt load is $150,000) and such a program might make a lot of sense, although even there, you might fairly question if that’s the best use of public funds. After all, someone with a $150,000 debt burden isn’t materially better off for owing “just” $140,000. (Note I said “public funds” rather than “taxpayer dollars.” That was deliberate. I wanted to illustrate how easy it is to sway public opinion simply by using different words to describe the exact same thing.)
Penn talked a bit about possible knock-on effects. “If student loan debt forgiveness is ongoing, students might eventually reorganize their financing toward additional borrowing,” the analysis said. They also noted that “some of the benefit from debt forgiveness might be captured by colleges themselves in the form of higher prices.”
Read more: Biden Shouldn’t Be Too ‘Generous’ With Student Debt: Larry Summers
Get ready for another COVID bill with student debt hidden in it this time around.
I fail to understand how student debt forgiveness changes anyone’s vote in November. If Biden can do this without Congressional approval, regardless of whether Biden signs off on this before or after the midterms, Biden will still be President and able to sign an executive order.
Therefore, registered voters who have student debt can vote however they want in November 2022 and still expect Biden to sign off on debt forgiveness. Biden would have to string this along until November 2024 to be able to use student debt forgiveness as a means of influencing votes.
Plus, no one will turn down debt forgiveness- but those people will know in their heart of hearts that this is not how our country should be operating- it is not equitable or fair. Kind of like the uneasy and undeserving feeling that almost every Trust fund kid that I have ever met has to live with. Kind of damages one’s sense of self.
If our country wants to provide free education for all, especially STEM majors, then our country should have a policy discussion.
“I fail to understand how student debt forgiveness changes anyone’s vote in November.”
Oh, my social media feeds are full of 30-50 yos who blame the debt they took on while unsuccessfully pursuing their masters or PhD in God-knows-what for their present unsatisfactory lot in life. Votes are there to be bought.
Biden isn’t concerned about 2024. He’s concerned about the midterms.
Also, no, “those people” will not “know in their heart of hearts that this is not how our country should be operating.” The same way as no, the people who stormed the Capitol on January 6 don’t know that that is not how our country should be operating.
The reality is increasingly this: People in America will take and do whatever they can get and get away with, respectively. The majority of them are not concerned, not even a little bit, about anything to do with fairness.
And we can’t have a “policy discussion” because — wait for it — half the country is too under-educated to discuss anything due in part to the prohibitive cost of education.
Finally — and The New York Times acknowledged this today — a lot of this debt wasn’t going to be paid back. I realize that’s so unpalatable for some people that they just refuse to accept it as reality, but reality it is nevertheless. And it’s still a reality given that Biden’s decision here barely makes a dent. Some people will just ignore this debt forever, and ever and ever. There’s nothing any of us can do about that. Instead of refusing to accept it, it’s psychologically easier to acknowledge it and move on to find a workable solution. Pretending that these people are going to pay all of this debt back doesn’t make it so.
I like your comment, Walt. It rings a bell for me, especially considering Biden’s action on student loans.
I agree with you. It is increasingly true that “people in America will take and do whatever they can get and get away with.” It’s a sad realization. It’s not true of everyone, but it’s an evolving trend in our culture for a number of reasons.
I agree too that one-half, or so, of the country is under-educated. But since 1776 a significant proportion of the country has been under-educated. Most adults where I grew up lacked education, but they had skin in the game, and they cared. Lack of education did not seem to limit them from talking about policies that affected them.
As much as I agree that education is too costly, I believe the absence of cause for engagement is also an ill. Yes, I have sufficient education to express myself. But more importantly, I have skin in the game. My wife and I are 60-ish. We have a condo and our health, thankfully. We have some stock. We’re also involved in local politics.
We’re established in the society. It worked for us. Other people in the society may not be “established and secure.” They may not even perceive the possibility. Furthermore, the ever-widening differences in the distribution of wealth today present a problem, as you noted, regarding debt and education.
I attended college for two and one-half years. I did not complete the university because I ran out of money and my parents were unable to assist. Had the tuition costs matched the costs today, no college education would have been possible for me, and my life today would be much different.
Since I was in school, tuition alone (not including other costs associated with attending the university) has risen by a factor 11x. Ongoing inflation is likely to continue increasing all the costs associated with college.
I’ve worked in four major national and international banks. Barring nuclear war, they’ll forever do well because they very carefully plan to succeed, no matter what happens to college loans. I do not sympathize with them in the least. No one, not even the government, should sympathize with them. They are very conservative in anticipating loan loss levels – meaning they expect losses, and they can write them off. I do believe also that some banks – not all – prey on families needing to fund post-secondary education for their children.
To your point, overwhelming debt has consequences for the individuals that have to carry it. Banks know that it’s not reasonable to impose such a huge financial burden on a young person who is not established. The minds and lives of young people are not fully developed. Banks expect parents to be able to pay off college debt. But parents cannot always do so.
Of course, coincidentally, President Biden just announced financial assistance to pay a limited amount of college debt. While it helps, it doesn’t solve the problem.
After leaving college 46 years ago, I went out on my own, taking part-time work in a local bank. Beyond making a few bucks and eating a very modest diet, I had no social life and no idea what I was doing. But I felt glad that I had not taken out debt to fund my education.
In the current state of affairs, the extremely wealthy will continue to fund the educations of their children, and the system for funding college education for less wealthy families will persist. Given inflation, the likelihood of children in suburban households attending college will only wane. In such an American society, our young adults will find fewer and fewer qualitatively engaging and affordable choices for post-secondary education. And heavy debt overhanging young lives will be a persistent outcome.
The banks who write off the losses will be quite fine. But life will be no fun for young people who don’t have a seat at the table of opportunity because they lack education. More young people will find themselves in the position of “taking whatever they can get and doing whatever they can to get away with it.” And in the end America loses participation in the economy from a significant proportion of its young.
Folks, slow your roll. Student debt represents money already paid to an educational provider. It is a sunk cost! No new money will be paid out!! Forgiveness of loans to students from the government represents an opportunity cost only. No cash outlay will be required. Income expected will be lost but at least some of that will be returned to the economy in other ways as people who would have been required to send principle and interest to the Treasury will be using it to buy cars and houses and pay their cellphone bills. The money itself is long gone but no new outlays are required. Surprised the giant brains at Wharton didn’t make that distinction (of course, mostly Wharton is full of economists so what can one expect?)
Look, it’s a social program. We give money to needy populations all the time. Sometimes they are needy because of bad decisions. They are still needy.
The student loan debate is slightly triggering (to me) because some of the most vocal recipients look privileged, act entitled, and aren’t shy about the “buy my vote” angle. In general Americans like their aid recipients to be meek, pitiful, and grateful.
Pragmatically, I agree with Mr Lucky that this is mostly just an accounting maneuver. I also think the extent of relief is modest. The $125K income limit seems kind of generous. At the end of the day, if this helps Dems avoid electoral wipeout, I’ll be pleased. I’m not a rabid progessive Dem, but the other party has gone bat-sh!t-crazy. Just my unwanted personal view, sorry.
What I’d really like is a deeper rethink of the cost of higher education. Which can’t be done via executive order.
Respectfully, “bat-shit” just doesn’t cut it anymore. We need another level to describe the crazy that the GOP has moved to. I’m not a farmer but I have seen a cow drop a few pies in my day and it’s not pretty. Maybe we use that now?
I don’t understand the claim that the student loan relief plan will increase inflation.
Just making up an example, suppose someone owes $30K in government student loans at 5%, and gets $10K cancelled. His normal payment is $1500/yr (5% of $30K, I’m ignoring amortization), but when the pandemic moratorium went into effect, his payment went to zero, so he had an extra $1,500 to spend on goods and services. Now he will start paying $1,000/yr (5% of $20K) so he will have only $500 extra to spend. That seems like the opposite of inflationary.
The alarmists seem to be implying that the entire $300BN of forgiven debt principal will suddenly be availble for spending.
The GOP reaction highlights their shift from the party of business & the wealthy to “the party of the working man,” meaning a right-wing nationalist populist party.
If I may indulge you with a snip and clip from Bess Levin’s commentary yesterday:
“Suggesting that only “elites” attend university and grad school, Rep. Jim Jordan, who has a bachelor’s, a master’s, and a law degree, tweeted: “Student loan ‘forgiveness’ will benefit the wealthy elites. Once again, Joe Biden forgets about Real America.” Senator Tom Cotton, who likes to pretend he didn’t go to Harvard for both undergrad and law school, and is just so in touch with the working man, wrote: “Biden owes Americans an explanation on why a truck driver who didn’t go to college is now responsible for the student loans of a rich lawyer.” Senator Rick Scott, last seen vacationing on a yacht in Italy, whined that the plan is a “burden on taxpayers.” Mitch McConnell, who’s never met a corporation or billionaire whose taxes he didn’t want to cut, called the move “student loan socialism” and “a slap in the face to working Americans who sacrificed to pay their debt or made different career choices to avoid debt. A wildly unfair redistribution of wealth toward higher-earning people.”