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Student Loan Forgiveness Would Be Costly and Regressive





The Biden administration is facing pressure to unilaterally cancel student loan debt. President Biden has stated his support for a minimum of $10,000 in student loan forgiveness, while other progressive Democrats are urging him to shift all student loan debt from borrowers to taxpayers. Regardless of whether the student loan forgiveness is complete or partial, means-tested or not, it is a costly, regressive policy. 

With over 43 million borrowers, the total federal student loan balance is around $1.6 trillion, with the average federal student loan balance being around $37,000. Given the total student loan balance, full student loan forgiveness would impose a huge cost on American taxpayers and add to the ballooning federal deficit. The Biden administration is reportedly considering alternatives, including canceling up to $10,000 in student loans per borrower. This so-called “targeted” student loan forgiveness is still expensive, costing taxpayers roughly $245 billion. Even means-tested student loan forgiveness would inflict a significant burden on taxpayers, costing $230 billion if student loans were forgiven only for individual borrowers who make less than $125,000 or $150,000 a year and households that make less than $250,000 or $300,000 a year. 

Besides costing taxpayers and adding to the already huge federal debt, student loan forgiveness could worsen inflation and lead to even greater costs of higher education. In fact, forgiving all $1.6 trillion in student loans could raise inflation by 0.1 to 0.5 percentage points. Furthermore, there is a risk that student loan forgiveness can establish a precedent of future loan forgiveness. This can instill recklessness in borrowers’ spending habits, as they will spend under the assumption that their loans could be forgiven in the future. In addition, student loan forgiveness could increase the already rapid rate at which higher education costs are rising. Over the last 20 years, the cost of a four-year public college–measured in tuition and fees–has increased by around 180 percent, or 9 percent annually. Forgiving student loans, with the corresponding expectation of future rounds of student loan forgiveness, would enable universities to increase their costs with the hope that the government, and ultimately taxpayers, will pick up the tab. 

The costly nature of student loan forgiveness, however, cannot be justified as a means to reduce income gaps as the policy would be extremely regressive and primarily benefit upper income borrowers. Student loan debt is highly concentrated in upper income groups, as loans are often used to pay for postgraduate schools–such as medical or law schools–where there is a high return on investment. As a consequence, higher income households hold loans at higher rates than lower income households. In fact, nearly one third of all student loans are owed by the wealthiest 20 percent of households, while the bottom 20 percent only holds 8 percent of loans.  Thus, across the board student loan forgiveness primarily helps those pursuing degrees in fields where an above average income is expected, failing to reduce existing income gaps. 

Even if student loan forgiveness was means-tested, it still remains a regressive policy. According to the Committee for a Responsible Federal Budget, even if student loan forgiveness is restricted to individual borrowers making less than $125,000 or $150,000 or households making less than $250,000 or $300,000, 71 percent of student loan forgiveness benefits will go to the upper half of this income distribution. So regardless of whether student loan forgiveness accords across the board or is means-tested, it remains highly a regressive policy that would primarily benefit those who do not need assistance from the government.

NTU supports measures to limit the executive branch’s ability to act without Congressional approval. Senator Rick Scott’s (R-FL) Debt Cancellation Accountability Act (S. 4483) would require the Department of Education to receive explicit confirmation from Congress through an express appropriation to waive, discharge, or reduce federal student loan debts an amount greater than $1,000,000 for two or more borrowers. Thus, the Department of Education would be required to submit a petition to Congress to waive, discharge or reduce federal student loans with detailed explanations as to why the borrowers that would be impacted need their federal student loans reduced, and how the Department received the authority to grant such reduction. This legislation would place important guardrails on the executive branch by limiting the ability of a president to pass the costs of student loans from the borrower to taxpayers. 

NTU welcomes and supports initiatives such as those by Senator Scott which curb the executive branch’s ability to forgive student loans without Congressional approval. For taxpayers who are already facing record-high inflation, it would be preferable for lawmakers to evaluate targeted reforms rather than sweeping, costly, and regressive policies. While student loan forgiveness may be politically popular with progressives, it is not good policy.