President Biden this week has reignited the possibility of wiping out millions of Americans student loan debt with the stroke of a pen, a policy that could cost the federal government $321 billion.
Although Biden has so far written off only a fraction of the debt he promised to erase during the campaign trail, the president — who is facing growing pressure from progressives as well as to a drop in approval ratings – this week raised the possibility of eliminating $10,000 per borrower.
“I’m looking at facing some debt reduction,” Biden said Thursday in response to a question at the White House. “I’m not looking at $50,000 in debt relief. But I’m carefully considering whether or not there will be additional debt relief.”
BIDEN CANCELLING STUDENT DEBT WILL WORSEN INFLATION, EXPERTS WARN
Wiping out $10,000 per borrower would force the government to cancel about $321 billion in federally guaranteed loans, according to a analysis released by the Federal Reserve Bank of New York last week. This would benefit about 11.8 million borrowers, or about 31.1%, and cancel 30.5% of loans past due or in default before the pandemic forbearance.
Under the policy, the average borrower would receive $8,478 in student loan forgiveness.
If the Biden administration imposed certain constraints on the pardon, such as a household income limit of $75,000, the cost of the program would rise from $321 billion to $182 billion, according to the New York Fed. As of December 2021, the total outstanding loan balance held by the federal government was $1.38 trillion.
The country’s debt level has already hit an all-time high of $30 trillion following unprecedented levels of spending during the COVID-19 pandemic.
Progressives, including Senate Majority Leader Chuck Schumer, DN.Y., have urged Biden to forgive $50,000 of unpaid federal debt per borrower by executive order. Democratic lawmakers have argued that Biden could use existing executive authority under the Higher Education Act to order the Department of Education to “modify, compromise, waive or release” student loans.
Biden supported writing off $10,000 in student debt for most borrowers during his presidential campaign, but raised questions about his legal authority to do so by executive order. Last year, the president requested a memo from the Department of Education to determine whether he had the authority to unilaterally write off student loan debt.
Such sweeping executive action would almost certainly face legal challenge, and it’s unclear whether it could survive. Critics have argued that the use of such power goes beyond the president’s authority granted by Congress. Canceling student loan debt would also add to the country’s already bloated national deficit, which totaled a record $2.8 trillion in fiscal 2021.
The plan could also disproportionately benefit wealthy Americans, according to a analysis by the Becker Friedman Institute for Economics at the University of Chicago. The study showed that erasing all student loan debt would distribute $192 billion to the top 20% earners in the United States, but only $29 billion to the poorest 20% of American households.
Under a universal loan forgiveness program, the average individual among the highest earning borrowers would receive $5,944 in forgiveness, while those with the lowest incomes would receive $1,070 in forgiveness, according to the study.
Outstanding student debt has doubled over the past decade, approaching a staggering $1.7 trillion. About one in six American adults owe money under a federal student loan, which is the largest amount of non-mortgage debt in the United States. It has been cited as a major impediment to people’s “economic life” by Federal Reserve Chairman Jerome Powell.
The proposal comes as U.S. consumers grapple with the highest inflation in four decades, with consumer prices up 8.5% in March from a year earlier. Soaring inflation has inflicted financial hardship on millions of American households, especially low-income families, eroding wage gains and creating a massive political challenge for Biden, who has seen his approval rating drop alongside rising prices.
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Some economists worry that putting more money in Americans’ pockets at a time of already sky-high inflation could make the problem even worse.
“It’s expensive, inflationary, poorly targeted, and doesn’t address the fundamental problems with our funding system for higher education,” Maya MacGuineas, chair of the Committee for a Responsible Federal Budget, said Thursday. “Complete debt cancellation would be a massive relief to wealthy doctors and lawyers, deepen our inflation crisis, and cost nearly as much as the entire 2017 tax cut.”