The University of Pennsylvania’s Wharton Business Model calculates that President Joe Biden’s new student loan cancellation plan could cost over $1 trillion, depending on the program’s final parameters and people’s response to it.
Biden announced on Wednesday that he was unilaterally canceling up to $10,000 student loan debt for individuals earning $125,000 or less and families making $250,000 or less.
For those who received Pell Grants, they will be eligible for up to $20,000 in debt forgiveness, with the same income thresholds.
Biden also extended the current moratorium on repaying student loans until the end of December.
Payments on the loans were initially suspended during the economic disruption caused by the COVID-19 shutdowns in 2020.
The Penn Wharton Business Model released its analysis of Biden’s new actions Friday, writing that the “new student loan forgiveness plan includes three major components. We estimate that debt cancellation alone will cost up to $519 billion, with about 75% of the benefit accruing to households making $88,000 or less.”
Loan forbearance — extending the repayment moratorium — “will cost another $16 billion,” the nonpartisan group added.
PWBM also delved into Biden’s new income-driven repayment program, which is part of his overall student loan plan, addressed in a White House fact sheet.
Do you think the federal government should cancel student loan debt?
The IDR program sets loan repayment thresholds based on the income of the borrower.
“The new income-driven repayment (IDR) program would cost another $70 billion, increasing the total plan cost to $605 billion under strict ‘static’ assumptions. However, depending on future IDR program details to be released and potential behavioral (i.e., ‘non-static’) changes, total plan costs could exceed $1 trillion,” PWBM concluded.
NEW: Biden’s student loan bailout could cost taxpayers over $1 TRILLION, according to the Penn Wharton Budget Model. pic.twitter.com/0ErGYWiL9F
— RNC Research (@RNCResearch) August 26, 2022
Multiple reporters have asked the White House how much the debt-cancellation program will cost.
On Thursday, a reporter questioned White House press secretary Karine Jean-Pierre, “Will the administration eventually release a cost estimate on the student loan forgiveness plan?”
She responded, “I don’t have any more to speak on to that,” explaining it would be up to the Department of Education to put out an estimate.
Reporter: “Will the administration eventually release a cost estimate on the student loan forgiveness plan?”
Jean-Pierre: “I don’t have any more to speak on to that.” pic.twitter.com/oMTkWpsNHI
— Washington Free Beacon (@FreeBeacon) August 25, 2022
At a Democratic National Committee rally in Rockville, Maryland outside of Washington, D.C., Thursday night, Biden argued the nation could afford the program, given the recent passage of the Inflation Reduction Act and lower federal deficits over the last two years.
He said the new Inflation Reduction Act will bring the deficits down by a total of $300 billion over the next ten years.
PWBM calculated the act would reduce the deficit by $248 billion over the next decade, unless the enhanced Affordable Care Act subsidies are extended over the entire decade, in which case deficit reduction would be just $89 billion.
Biden also cited the significantly lower deficits in fiscal years 2021 and 2022, primarily due to the end of emergency COVID-19 spending.
“Thanks to our historic deficit reduction, we can afford to cancel $10,000 in student debt and $20,000 if you’re on a Pell Grant, for tens of millions of Americans making under $125,000,” he said.
The Congressional Budget Office estimates the 2022 deficit will be $1 trillion, down from $2.8 trillion in 2021.
The CBO projects deficits will average $1.6 trillion per year between 2023 and 2032.
Former Clinton Treasury Secretary Larry Summers warned in a series of tweets on Monday that canceling student debt would be inflationary.
“Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions,” Summers said.
Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.
— Lawrence H. Summers (@LHSummers) August 22, 2022
Former Obama administration economist Jason Furman also believes the debt cancellation will cause inflation.
Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.
— Jason Furman (@jasonfurman) August 24, 2022
“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Furman tweeted Wednesday.
Furman told CNBC Friday that launching the debt-cancellation program now will create pressure to repeat it over and over in the future in the name of being fair to future college goers.
Obama economist Jason Furman says the “unfairness” from Biden’s student debt bailout will be “felt strongly” by Americans. pic.twitter.com/1TKWYmfLpg
— RNC Research (@RNCResearch) August 26, 2022
“These type of unfairnesses — they’re felt really strongly,” he said.
Furman advised issues involving college costs and loans should be handled legislatively and not by a presidential decree.
