Students holding loan forgiveness signs
Source: Getty Images

Who Would Pay for Student Loan Forgiveness

Mohit Oberoi, CFA - Author
By

Aug. 24 2022, Published 8:51 a.m. ET

Joe Biden is expected to announce student loan forgiveness as early as Aug. 24. While some student loan borrowers are eagerly waiting for it, some are wondering who would pay for it.

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Biden has already canceled outstanding student loans for some borrowers, in a series of steps to support the recovery of the U.S. economy. Student loans have always been a contentious issue, but the problem was exacerbated by the COVID-19 pandemic, when many people lost their source of income.

Will Biden announce student loan forgiveness?

During his election campaign, Biden talked about canceling $10,000 in student loans for borrowers. While he has delivered on many promises, including the green energy pivot, student loan forgiveness has yet to happen. Democrats have been pushing Biden to fulfill the promise he made to the electorate.

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biden student loan forgiveness
Source: Getty Images

How much would student loan forgiveness cost?

Student loans in the U.S. stand at around $1.75 trillion (close to the GDP of South Korea, the world’s tenth largest economy). If Biden decides to waive $10,000 for all student loan borrowers, the CRFB (Committee for a Responsible Federal Budget) estimates it would cost $245 billion. And if those with higher incomes are excluded from the waiver, it would still cost $230 billion (roughly 10 percent of the U.S. GDP, the world’s largest).

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Who would foot the bill for student loan foregiveness?

When governments spend money, they either raise funds through taxes or issue new debt. For instance, the Inflation Reduction Act proposes to raise money by increasing the minimum corporate tax to 15 percent, applying a 1 percent tax on stock buybacks, and pushing for better tax enforcement by the IRS.

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The big spending in 2020 and 2021 was financed by raising more debt. In fiscal 2021, the country’s deficit was around 13 percent, the highest since World War 2. The total U.S. national debt is now approaching $31 trillion and the debt-to-GDP ratio is around 124 percent.

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Who pays for student loans forgivingness?

All the government spending has to be paid for the taxpayers, both individual and corporate. Even if the spending is debt-financed, the interest and principal have to be paid by the taxpayer. The average debt per U.S. citizen is now above $92,000, and growing.

cost of student loan cancelation
Source: Getty Images
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It remains to be seen how Biden plans to finance student loan forgiveness. However, it won't be done easily, with some Democrats, such as Joe Manchin, against the debt-fueled spending spree. Manchin also blocked the Build Back Better Act, calling it inflationary.

Even the student loan moratorium, which has been extended multiple times since March 2020, is inflationary. While the Fed has been aggressively raising interest rates, the accommodative fiscal policy is worsening inflation in the U.S.

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