According to a report released by the University of Pennsylvania’s Wharton School, the recent student loan forgiveness package and income-driven repayments announced by the Biden Administration could cost Americans as much as $605 billion over the next decade. However, three-quarters of that spending would benefit families earning less than $90,000.
Last week’s transformative plan to lower student debt – now said to be around $1.75 trillion – was heralded by students, Democrat-leaning leaders and some philanthropic organizations happy to see $10,000 eliminated for borrowers plus an additional $10,000 more for Pell Grant recipients. Conservative leaders weren’t thrilled with it, calling it bloated and punitive for those who didn’t take out loans or had paid them off, wondering too how taxpayers would be able to absorb the immense cost. They also were highly critical of colleges and universities, particularly those with large endowments, for increasing tuition costs over the past two decades.
“President Biden’s student loan socialism is a slap in the face of every family who sacrificed to save for college, every graduate who paid their debt and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt,” Sen. Mitch McConnell (R-Ky.) said in a statement following the announcement. “President Biden’s inflation is crushing working families, and his answer is to give away even more government money to elites with higher salaries.”
However, Biden has said the plan would not impact the federal budget and would help those in the working class. White House officials have had a field day on Twitter over the past few days, calling out Republican leaders such as Vern Buchanan (R-Fla.) and Marjorie Taylor-Greene (R-Ga.), who accepted large Paycheck Protection Program (PPP) handouts during the COVID-19 pandemic. Sen. Elizabeth Warren, a staunch proponent of an even larger $50,000 in relief for all 43 million borrowers, took a jab at McConnell by saying he “graduated from a school that cost $330 a year. Today it costs over $12,000. He can spare us the lectures on fairness.”
Biden also weighed in. “Some think it’s too much – I find it interesting how some of my Republican friends who voted for those tax cuts think we shouldn’t be helping these folks,” he said. “Some think it’s too little, but I believe my plan is responsible and fair. It focuses the benefit of middle-class and working families, it helps both current and future borrowers and it’ll fix a badly broken system. There is plenty of deficit reduction to pay for the programs … many times over.”
Greene responded to the retort from the White House over her PPP acceptance by telling President Biden to “go to hell.”
Inside the numbers
The initial cost of the plan in 2022 would total $486.6 billion in loan forgiveness, $16 billion in forbearances and $41.6 billion for income-driven repayment. Over the next 10 years, the government would spend between $5 billion and $6.5 billion each year on forgiveness and between $2.6 billion and $4 billion on IDR, for a total of $605.4 billion.
The pool for those who qualify is expansive and includes those who’ve had loans and earn less than $125,000 year, plus couples making $250,000 annually. Biden has assured those who want to follow through an easy path to get forgiveness. As to forbearances, Biden pushed repayments back for the sixth time, giving borrowers a final extension until Jan. 1, 2023, when they would begin again.
One concern from Republicans that could come to fruition is that the current plan modeled by Wharton shows that these are “static assumptions” and that there is the possibility because of increases in costs or other factors that forgiveness could top $1 trillion. Income-driven repayments alone would total around $70 billion. Wharton’s model not only accounts for those who have held loans in the past but also current students, thus some of the increases from early figures that showed it would cost around $330 billion.
“The new features in the new IDR proposal could sharply increase take-up rates,” study authors, led by Penn Wharton Budget Model junior economist Junlei Chen, noted. “Even many borrowers who anticipate not being qualified in future years would typically be better off enrolling in the intermediate years in which they are qualified. There would also be financial incentives for future borrowers to shift education financing toward more borrowing to take advantage of the 5% repayment threshold. If the Department of Education simply auto-enrolled borrowers for which it had sufficient information (i.e., switched from “opt in” to “opt out”), the additional costs of the IDR program alone could reasonably exceed $450 billion.”
Lowering debt responsibility, lowering the threshold for income repayment, and increasing Pell grant awards (which got a boost to $20,000 under the Biden plan) may allay concerns over retention and enrollment in the short term and will help past borrowers. However, if colleges continue to raise tuition in response to inflation, that could eliminate any positive gains and might not impact future students.