Analysis-Biden’s Student Loan Forgiveness May Erase Climate Savings, Drug Laws

By David Lawder

WASHINGTON (Reuters) – President Joe Biden’s controversial plan to forgive up to $20,000 in student loans for tens of millions of Americans could wipe out the projected $300 billion deficit reduction that his tough legislation on climate, drugs and taxation over 10 years – as much as twice.

The extent of the additional federal debt resulting from the one-time gift to college graduates and former students depends on the estimates used, economists say.

Nongovernment budget analysts project the total 10-year cost of the program at $500 billion to $600 billion, including extending the moratorium on all federal student loans through Dec. 31 and reducing future income-based payments.

The White House initially dodged questions about the cost, eventually providing a “cash flow” estimate on Friday of loan repayments of $24 billion a year, or about $240 billion over a decade — assuming 75 percent of eligible borrowers apply.

Bharat Ramamurti, deputy director of the White House National Economic Council, told reporters the plan was fiscally justified because the federal deficit was on track to decrease by $1.7 trillion for fiscal 2022 compared to the previous year. The smaller deficit is largely due to the end of several COVID-19 aid programs and unexpectedly higher revenues.

“We’re using a portion of that — a very small portion of it — to provide relief to middle-class families under the president’s plan,” Rammurti said.

Some economists who track federal spending and workforce issues have confirmed Biden’s plan offers unnecessary aid to many financially well-off graduates, potentially fueling inflation and increasing deficits as borrowing costs rise.

They also said the move was confusing as the administration worked to reduce deficits in the recently signed “Inflation Reduction Act” with a 15 percent minimum corporate tax and new funding mandates for the Internal Revenue Service.

The relative face just a week later “is bad economic policy,” said Alan Auerbach, a public finance economist at the University of California, Berkeley. “To go from saying ‘we’re doing this in a responsible way’ to turning around and throwing away all the money they’ve saved and more, politically, it doesn’t make sense.”

Due to insufficient support in Congress, Biden is taking executive action to forgive $10,000 to $20,000 of student loan debt for individuals making $125,000 and married couples up to $250,000. The plan could cost $440 billion to $600 billion over a decade, according to a “center estimate” by the Committee for a Responsible Federal Budget (CRFB), a nonpartisan group that advocates for deficit reduction.

The University of Pennsylvania’s Penn Wharton budget model estimates the total cost at $605 billion, with debt cancellation alone at $469 to $519 billion.


However, Penn Wharton’s estimate shows that most of the debt relief — 74 percent — is likely to go to households earning less than $82,400, and less than 5 percent will go to households earning more than $141,000. That may assuage some criticism of the program as helping wealthy law and medical school graduates.

Some of those dollars “will end up in the pockets of people who don’t need them, but proportionally, the biggest bang for the buck is at the bottom,” said Harry Holzer, a labor economist at Georgetown University.

Holzer, however, said he had concerns about “adding another half a trillion dollars to the national debt, which is not insignificant” after a $6 trillion debt runoff for COVID-19.


Biden is under pressure to fulfill his 2020 campaign pledge to forgive all federal student debt related to undergraduate tuition from public two- and four-year colleges and universities for debt holders who earn up to $125,000 a year. A new poll taken shortly before Biden’s announcement last week showed broad support for the general concept of student loan forgiveness.

Figures for Progress, a left-leaning think tank, said its poll last week showed 60 percent of American voters support eliminating some or all of federal student debt, including 81 percent of Democrats, the 52% of independents and 45% of Republicans.

Research shows that a growing percentage of US undergraduates come from poor and minority backgrounds and struggle after graduation with high debt payments and rising housing costs in urban areas.

A Pew Research study found that 20% of undergraduates were from families in poverty in 2016, up from 12% in 1996. The increase in the percentage of these students was sharper at private, for-profit institutions and less selective colleges.

Shortfalls aside, economists said there are more effective ways to spend the $500 billion to improve access to higher education and job skills, such as sharply increasing Pell grants for low-income students, funding apprenticeships and training programs for in-demand areas, offering free community college and further improvements to income-based loan repayments. But those efforts would require stronger support in Congress.

(Reporting by David Lawder; Additional reporting by Alexandra Alper; Editing by Heather Timmons and Paul Simao)

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