CBO Puts Full Price Tag on Biden Student Loan Relief Scheme

Since President Biden announced he would forgive the student loans of millions of Americans last year, the biggest unanswered question about the scheme has been how much it would cost taxpayers.

It’s a question that only exists because the U.S. government took over the student loan industry in 2010. The government has had to borrow the money to fund student loans ever since. If the people who took out student loans are excused from having to pay their debt as they agreed, that’s a big part of the national debt that won’t be paid back. That means other Americans are being forced to bear the cost of their unpaid debt.

Answering the question of how much it will cost has been difficult. That’s mainly because the Biden administration keeps changing its proposed eligibility rules for the scheme. The Brookings Institute’s Adam Looney recognized the problem after the administration proposed new rules earlier this year.

The Biden administration in January proposed new rules for Income-Driven Repayment (IDR) plans for federal student loans. The proposal would substantially reduce amounts borrowers would be asked to repay by, among other things, capping loan payments at a much lower fraction of borrowers’ income than under current policies, eliminating the accrual of unpaid interest, and reducing the number of loan payments required before loans are forgiven in certain circumstances. It isn’t clear who will benefit from these changes nor what the true cost will be. The Department provided a partial estimate of the cost of the plan ($138 billion over ten years), but other analysts expect the true cost to be several times larger and to exceed $333 billion dollars over the next decade.

That the Department of Education does not know what the true cost of its signature student loan repayment plan will be, who will benefit, or what its economic consequences will be reflects a broken regulatory process. It will result in regulations that are unlikely to achieve the objectives of the 2007 legislation, the College Cost Reduction and Access Act, or the Department’s expressed goals.

In other words, President Biden’s student loan relief scheme guarantees a costly government failure. How costly has just been addressed by a new analysis from the Congressional Budget Office, which looked at the Income-Driven Repayment portion of the program. Instead of $138 billion over its first ten years, the CBO expects it will cost at least $230 billion. Those costs will go up to $275 billion should the Supreme Court rule against the scheme, which the U.S. Congress has never approved.

Why will Biden’s student loan forgiveness be so much more costly than promised?

Reason‘s Eric Boehm reports on how the CBO’s estimate came to be nearly double the Department of Education’s claimed cost:

The CBO points out that the Department of Education did not account for the “behavioral effects” of the new policy—in other words, it did not include estimates for how many additional students would take out loans if the repayment method was altered.

The CBO, however, did. It found that reducing what student loan borrowers will eventually have to pay back unsurprisingly caused more students to take out loans—including loans that they would be unable to pay off in full. Overall, the annual volume of student loans would increase by about 12 percent, the CBO estimated, with both undergraduate and graduate students seeking more loans.

“Students who would be expected to take out federal loans would borrow more,” Leah Koestner, a CBO budget analyst concluded in a presentation on Wednesday. And “some students who would not be expected to borrow under current law would take out loans.”

Suppose student loans are already a costly problem. How does imposing a student loan forgiveness scheme making them into an even bigger, more costly problem make any fiscal sense?

It worsens when you discover who will gain the most from the scheme.

Who benefits the most from the student loan forgiveness scheme?

As for the other question of who will benefit from President Biden’s student loan forgiveness scheme, the Committee for a Responsible Federal Budget has worked out that answer. They determined that “57 percent to 65 percent of the extended pause and cancellation will go to those in the top half of the income spectrum”. Here’s their bottom line:

Importantly, none of these estimates take into account the Administration’s problematic Income-Driven Repayment proposals. And none account for the cost of financing its plan – with resulting increases in inflation disproportionately affecting lower-income households.

In the end, the Administration’s student debt cancellation proposal is costly, inflationary, will drive up higher education costs, and will deliver the majority of the benefits to those in the top half of the income spectrum.

That doesn’t sound very equitable, does it?

The CBO’s new findings confirm the Income-Based Repayment proposals are far more problematic than anyone in the Biden administration has acknowledged. The Biden administration’s student loan forgiveness scheme is about as far from a fair or sound fiscal policy as possible.