Federal Government to Benefit from Student Loan Ruling

The Supreme Court has determined President Biden’s student loan relief scheme is unconstitutional. Because of that ruling, millions of student loan borrowers will resume making monthly payments on their debt in October.

But before any of those borrowers have to write a check to Uncle Sam, the U.S. government will realize a huge bonus in deficit reduction from the Supreme Court’s ruling. Reuters’ David Lawder explains why the student loan ruling is a windfall for the federal government:

The Department of Education had estimated that the debt relief would cost taxpayers about $30 billion annually over the next decade through foregone loan repayments – about $2.5 billion per month – or about $379 billion over a decade.

The U.S. Treasury last year took a $430 billion charge against fiscal 2022 budget results to cover these costs, as well as an extension of the general COVID-19 moratorium on payments through the end of 2022. The move had the effect of limiting a dramatic reduction in the fiscal 2022 deficit to $1.375 trillion from $2.775 trillion the prior year. The federal fiscal year ends on Sept. 30.

Without the advance recognition, the deficit would have fallen below $1 trillion as COVID relief programs ended and revenues surged.

The $430 billion to cover the cost of President Biden’s failed student loan forgiveness scheme was the third largest contributor to the growth of the national debt in 2022.

Now, President Biden will also get to claim credit for reducing the budget deficit in 2023. But that accomplishment will result from cleaning up the accounting shenanigans used to set up the scheme:

Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget (CRFB), a fiscal watchdog group, estimated that about $320 billion of the pre-emptive costs would be reversed during fiscal 2023 after the Supreme Court ruling.

The Congressional Budget Office is forecasting an increased deficit of $1.539 trillion this year due to falling revenues and higher spending and healthcare costs. A reversal of more than $300 billion would make it appear that this year’s fiscal deficit fell slightly from 2022.

“It’s deficit reduction relative to a deficit increase that never really went into effect,” Goldwein said. Biden “announced the policy and they weirdly recorded it as having increased the deficit before they implemented the policy in any meaningful way.”

The amount of deficit reduction is smaller than it might have been because of steps the Biden administration has taken to income-based student loan payment plans.

The U.S. Treasury will also benefit from the ruling because of the federal government’s role as the dominant student loan lender. It will collect an extra $2 billion monthly from student loan borrowers once they resume making payments.

That’s going back to business as usual. Taking in extra cash is why the federal government got into the student loan business in the first place.