Who Pays Student Loan Forgiveness?

(NEXSTAR) — Despite recent moves to cancel federal student loan debt for thousands of Americans, including the latest round announced on Tuesday, many continue to call on President Joe Biden to cancel even more.

Nearly 43 million Americans are responsible for approximately $1.6 trillion in federal student loans. During his campaign, Biden supported the $10,000 forgiveness per federal borrower, but, more than a year into his administration, we haven’t exactly seen that. Some borrowers have seen their debt wiped out, such as the estimated 40,000 affected by recent changes aimed at “fixing long-standing failures in student loan programs”.

If Biden were to write off student loan debt more broadly, who would pay?

The obvious first answer is the federal government.

The important thing to know is that when the government provides student loans, the federal debt increases, according to the Urban Institute, but the federal deficit projection usually goes down quite a bit. Federal student loans are made with borrowed money because the federal government expects interest and principal payments in return. When you make a payment on your federal student loans, the federal debt decreases and the government has earned interest on your loan.

If Biden decided to cancel student debt, the federal deficit would increase, but how much depends on the value of the canceled loans, according to the Urban Institute. However, this would not have an immediate impact on the national debt. Eventually, the federal debt will climb when payments that were supposed to be paid are not.

Canceling student debt could cost between $245 billion (if Biden’s proposed $10,000 is approved) and $1.6 trillion for all federal loans to be written off, according to a report by the Committee for a Federal Budget responsible.

This means that student loan forgiveness “would rank among the greatest transfer programs in American history,” Adam Looney explained in a Brookings Institution report. If just $10,000 per borrower is forgiven, it would cost roughly what the United States has spent on welfare since 2000, Looney noted.

Taxpayers would likely feel some pressure in turn depending on the number of loans forgiven.

Taxpayers are already responsible for defaulting on existing student loans. The Bipartisan Policy Center released a 2021 report suggesting the cost to the average taxpayer would be exponentially greater over time than the cost of existing defaults if widespread forgiveness were granted.

“The expansion of the generous refund and rebate plans suggests that costs to taxpayers may continue to rise,” the report said. However, it is not immediately clear how or when taxpayers would feel these increases.

Canceling the student loan debt of 40,000 borrowers earlier this week has an estimated cost to taxpayers of $3 billion, according to a statement Thursday from Republican House Budget Committee leader Jason Smith of Missouri.

In some cases, student borrowers may still have to pay money for loan forgiveness. Under some repayment plans like the Civil Service Loan Forgiveness, federal law states that the forgiveness is not taxable. When Biden signed into law the American Rescue Plan Act last year, he exempted the federal student loan exemption from federal tax until 2025 “generally,” Forbes reports.

Additional guidance on the types of other student loan repayment plans that are and are not taxable under this provision has not been released.

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