(NEXSTAR) – Despite recent moves to forgive federal student loan debt for thousands of Americans, including the latest round announced Tuesday, many are continuing to call on President Joe Biden to cancel even more.
Nearly 43 million Americans are responsible for roughly $1.6 trillion in federal student loans. During his campaign, Biden supported forgiving $10,000 per federal borrower, but, over a year into his administration, we haven’t exactly seen that. Some borrowers have seen their debt erased, like the estimated 40,000 impacted by recent changes to “fix longstanding failures in the student loan programs.”
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If Biden were to more broadly cancel student loan debt though, who would pay?
The first and obvious answer is the federal government.
The important thing to know is that when the government grants student loans, the federal debt increases, according to the Urban Institute, but the federal deficit projection typically declines a small amount. 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 will increase but by how much depends on the value of the forgiven loans, according to the Urban Institute. It wouldn’t, however, have an immediate impact on the national debt. Eventually, the federal debt will climb when payments that were expected to be paid, aren’t.
Canceling student debt could cost anywhere from $245 billion (if Biden’s proposed $10,000 per borrower is approved) to $1.6 trillion for all federal loans to be erased, according to a report from the Committee for a Responsible Federal Budget.
That means student loan forgiveness would “rank among the largest transfer programs in American history,” fellow Adam Looney explained in a Brookings Institution report. If just $10,000 per borrower is forgiven, it’d cost roughly what the U.S. has spent on welfare since 2000, Looney noted.
Taxpayers would likely, in turn, also feel some pressure depending on the amount of loans forgiven.
Taxpayers are already on the hook when existing student loans default. The Bipartisan Policy Center released a 2021 report suggesting the cost to the average taxpayer would be exponentially higher over time than the cost of existing defaults if widespread forgiveness is granted.
“The expansion of generous repayment and forgiveness plans suggest that costs to taxpayers may continue to rise,” the report reads. However, it’s not immediately clear how or when taxpayers would feel those increases.
Forgiving student loan debt for 40,000 borrowers earlier this week has an estimated cost to taxpayers of $3 billion, according to a Thursday statement from the House Budget Committee Republican Leader Jason Smith of Missouri.
In some cases, student loan borrowers may still have to dish out money for loan forgiveness. Under certain repayment plans like Public Service Loan Forgiveness, federal law says the forgiveness is non-taxable. When Biden signed the American Rescue Plan Act into law last year, he made federal student loan forgiveness exempt from federal taxation through 2025 on “a general basis,” Forbes reports.
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Additional guidance on what types of other student loan repayment plans are and aren’t taxable under that provision hasn’t been released.