President Biden’s Costly New Student Loan Relief Scheme

Who knew canceling student loans for millions of highly educated, well-to-do Americans could run up the federal government’s budget deficit by billions?

The Committee for a Responsible Federal Budget knows. The CRFB ran the numbers on how costly President Biden’s latest effort to zero out the student loan debt of millions of Americans will be. They came up with some very large numbers:

The Biden Administration recently announced a new plan to cancel student debt for up to 30 million borrowers and released a preliminary rule this morning detailing parts of this plan. The proposal, which is being introduced through the rule making process, would replace the Administration’s initial proposal to cancel between $10,000 and $20,000 per person of debt, which was struck down by the Supreme Court.

Elements of the plan in today’s proposed rule would cost nearly $150 billion, according to the Department of Education. However, this excludes a proposal to allow the Secretary of Education to cancel debt for those facing hardship or likely to default. Including this provision, we estimate the plan could cost $250 billion to $750 billion, depending on how the additional cancellation is designed.

It’s how the Biden administration may choose to define “hardship” that leads to the inflated cost of its latest student loan relief scheme.

An arbitrary definition for “hardship”

The CFRB points to a study by the Foundation for Research on Equal Opportunity’s Preston Cooper that suggests millions of students could see their student loan debt go away under Biden’s new proposal. Cooper argues that debt cancellation for so many would be possible because of its arbitrary definition of “hardship.”

The nebulous “hardship” standard would give the secretary broad authority to cancel student debt at their discretion. By my own estimate, some of the factors signifying hardship could cover over 70 percent of college students. Moreover, as one measure of hardship is repayment history, the hardship standard could create moral hazard, since those who fall behind on their loans could see them canceled. Finally, there is no way to assess whether the “hardship” standard is a reliable indicator of default, as borrowers cannot default on canceled loans.

The moral hazard argument applies because if a student borrower can get their loan canceled by falling behind on their payments, they have a huge incentive to take that action on purpose to trigger a hardship claim.

The Biden administration’s hand-wavy definition of hardship is why the CFRB’s cost estimates for the policy have such a big range. The CFRB discusses how else that arbitrary policy choice will hurt all Americans:

In total, our $250 billion to $750 billion estimate for the total cost of the plan would be in line with the cost of the Administration’s $400 billion blanket debt cancellation, which was ruled illegal by the Supreme Court. It would be on top of more than $600 billion of debt cancellation already enacted through unilateral executive action. As we have shown before, these policies would put upward pressure on inflation and interest rates by supporting stronger demand, and much of the benefits would accrue to high-income and highly-educated Americans.

The new Biden student loan cancellation scheme is a kick in the teeth for all those Americans who never took out a student loan. Many of them have lower incomes than those Biden wants to reward by canceling their student loans.

Not to mention all those Americans who took out student loans but have since paid them off on time and without complaint. Americans who made personal sacrifices to make good on their student loan obligations. They’re getting the rawest deal from President Biden’s costly new student loan relief scheme.

Craig Eyermann is a Research Fellow at the Independent Institute.
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