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As President Joe Biden plans to forgive up to $10,000 in federal student loans per borrower, a political dream long sought after by millions of Americans struggling with years of repayment could become a reality.
But canceling student loans isn’t a magic wand that makes these loans go away — they’ll have to be paid off one way or another. But the question is: By whom?
Who Pays for Student Loan Debt Cancellation?
Canceling federal student loans will cost the federal government hundreds of billions of dollars – and the general public will end up footing the bill.
According to the Committee for a Responsible Federal Budget (CRFB), canceling up to $10,000 in federal student loans per borrower would cost the government about $245 billion. If income caps were put in place to limit forgiveness to low-income people, that would only reduce the CRFB estimate to around $230 billion.
But what exactly does “costing the government” mean? Canceled federal student loans would be immediately added to the federal deficit, which measures how the country owes more money than it receives in a year.
Analysts agree that canceling federal student loans would increase the deficit. But what they are divided on is how big that addition would be and how the government could possibly recoup the costs.
How deficit reduction may eventually trickle down to consumers
Some worry about the negative effects large amounts of national debt can have on the economy, including making it vulnerable to rising interest rates and rising inflation. But others claim that our government has run a deficit every year since 2001 without too many negative effects, and we wouldn’t see much of an impact from canceling student loans.
The federal government ran a $2.8 trillion deficit in fiscal year 2021, much of which was Covid-19 relief spending, including stimulus checks and rental assistance. emergency. The deficit stood at around 13% of GDP and was the second largest deficit since the end of World War II.
To put this into perspective, deficits over the past five decades have averaged only 3% of GDP. The higher this percentage, the less the country will be able to repay its debt and runs a high risk of default – and a default could cause massive panic in the global financial system. The CRFB’s estimate of canceling student loans at a cost of $230 billion would add less than 1% to the overall 2021 deficit.
A recent report from the US Government Accountability Office (GAO) warns that current federal spending is at an unsustainable level and is putting the country’s fiscal health at risk.
The government has two options to reduce the deficit: cut spending or increase taxes. According to some political analysts, this is how the cost will eventually trickle down to the general public.
“There are trade-offs and most likely if we spend that money on canceling student loan debt, we won’t be spending it on other things that we want the government to do,” says lead researcher Sandy Baun. non-resident at the Urban Institute. .
Spending cuts could potentially cut some of the country’s most important social programs. In 2020, the Congressional Budget Office (CBO) released a report on various strategies the federal government could use to reduce its deficit. These included cutting vital programs, including eliminating free and reduced school meals or raising the full retirement age for Social Security.
That means some of Biden’s social initiatives, like universal preschool or guaranteed parental leave, may struggle to become law in the future.
Raising taxes to increase income could also have an impact. Not only could personal income tax rates be increased, but the CBO report suggested reducing or repealing popular tax credits and deductions, including limiting deductions for charitable donations, as measures the government could take to increase revenue. President Biden has pledged not to raise taxes on the middle class, but what future administrations might do to contain the deficit remains to be seen.
Proponents of federal student loan forgiveness say the people who will benefit the most from forgiveness should not be the ones paying the price.
“We should raise taxes on corporations, high earners and the wealthy,” says Charlie Eaton, co-founder of the Higher Education, Race and the Economy (HERE) lab at the University of California. “These people should be paying more because they have benefited from a more educated workforce that produces the wealth they have accumulated.”
There is also the question of whether canceling student loans will increase inflation. Some researchers believe that giving consumers more money to spend, while the world is reeling from supply chain problems, will only drive up inflation. Others argue that half of student borrowers have zero or negative net worth, and the extra money in their budget each month could be used to pay off their other debts.
Proponents say the immediate benefits of student loan debt forgiveness are greater
Not everyone agrees that the long-term implications of increasing the deficit by canceling federal student loans are worth worrying about. Proponents of canceling student loans argue that canceling debt now would have an immediate impact on borrowers by putting more money in their pockets, and they say that’s bigger than the federal deficit.
“It’s not that we don’t worry about the macroeconomic implications [of student loan debt forgiveness]says Cody Hounanian, executive director of the Student Debt Crisis Center, a nonprofit organization that advocates for the cancellation of student debt. “I’m just prioritizing what everyday Americans need right now.”
Canceling student loan debt could remove significant barriers preventing ordinary Americans from accessing upward mobility. Research suggests it could help consumers from less privileged backgrounds build wealth and combat racial disparities by benefiting those who carry the largest loan balances, typically black and Latino consumers. These benefits, for some, are worth all the potential ramifications down the road.
“Cancelling these debts is a way to right a set of wrongs that are very unequal across race, gender and socioeconomic background,” Eaton says. “It’s worth it.”
As of now, the White House says a decision on federal student loan forgiveness will be made before the end of the final payment break on August 31. If Biden chooses to cancel $10,000 in federal student loans per borrower, it will add hundreds of billions of dollars. dollars to the national deficit – and sooner or later the general public will have to foot the bill.