The White House on Friday pegged the cost of President Biden’s student loan forgiveness plan at $24 billion per year over the next decade.
The $240 billion preliminary cost estimate, which the administration unveiled two days after Mr. Biden announced his plan to write off up to $20,000 in debt for borrowers making $125,000 or less per year, comes far below outside, independent estimates, which say the total cost of the plan to taxpayers could exceed $1 trillion.
“Our estimate is that the debt relief proposal will reduce average annual receipts in the student loan program by about $24 billion a year over the next 10 years,” Deputy Director of the National Economic Council Bharat Ramamurti told reporters. “So the way to think about this is that because we are providing debt relief, reducing the outstanding balance for some people, [and] eliminating it for other people, that means we’re not going to be collecting a certain amount of payments that we otherwise would have been collecting.”
Mr. Ramamurti said the estimate assumes 75% of those eligible will apply for loan forgiveness.
The methodology behind the calculation, which simply accounts for the decrease in cash flows from loan payments, is far less in-depth than the methodology normally employed by the Office of Management and Budget to project the budget implications of policy decisions. The Department of Education and Office of Management and Budget are expected to produce a more detailed analysis in the coming weeks.
Still, the White House estimate pales in comparison to those offered by outside economists.
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Mr. Biden on Wednesday unveiled his long-awaited plan, which includes canceling $10,000 in student debt for borrowers who earn less than $125,000 per year and $20,000 in debt for those who received Pell Grants.
The president has also extended the pause on federal student loan payments brought on by the COVID-19 pandemic one “final” time through December.
Mr. Biden’s plan also calls for lowering monthly payments on outstanding undergraduate loans from 10% to 5% of discretionary income and forgives loan balances after 10 years of payments, instead of 20 years for original loan balances of $12,000 or less.
A Penn-Wharton Budget Model published on Friday pegs that the cost of just the debt cancellation portion of the plan will cost up to $519 billion. The additional months of loan forbearance tacked on to the plan will cost taxpayers another $16 billion, according to the model. The changes to the income-driven repayment program will cost $70 billion.
That $605 billion figure for all three components of the plan, is under static assumptions. But the total could balloon to more than $1 trillion when accounting for potential behavioral changes spurred by changes to the program, according to the analysis.
The nonpartisan Committee for a Responsible Federal Budget estimates Mr. Biden’s plan will cost the U.S. Treasury between $440 billion and $600 billion, according to its analysis published earlier this week. On Friday the group released a separate analysis projecting that the plant would boost inflation by 0.15% to 0.27% over the next year.
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“The inflationary effect of these changes will more than undermine gains from the Inflation Reduction Act,” the CRFB report reads. “They also make it more difficult for the Federal Reserve to fight inflation, increasing the amount they must raise rates and elevating the chance that the economy ends up in a recession.”
The proposed changes do not reduce the amount of borrowing going forward, but future administrations will likely find themselves under pressure to cancel student loan debt again.
The CRFB analysis projected that the student loan bailout will eliminate $550 billion from the current outstanding debt balance of $1.6 trillion in the immediate term, but that the debt will return to current highs as college students continue to borrow.
In rolling out the plan, Mr. Biden said the widespread relief would reverberate across the entire economy by allowing those saddled by high debt loads to “crawl out from under that mountain of debt, to get on top of their rent and utilities, to finally think about buying a home or starting a family or starting a business.”
More than $124 billion, or approximately 8% of student debt, is in default, according to a December report by the Education Data Initiative. An average of 15% of student loans are in default at any given time, and more than 1 million student loans enter default each year.
More than 43 million Americans hold federal student debt, with an average balance of $37,667, according to federal figures.
Administration officials expect up to 20 million people to see their student debt completely forgiven under the plan.
Until Friday, Mr. Biden had yet to put a price tag on the plan or lay out ways to bring down skyrocketing tuition rates.
But the move is facing political flak from the left and the right and is likely to face significant legal scrutiny.
Some liberals said Mr. Biden didn’t do enough. They wanted him to cancel $50,000 or more per borrower. Republicans said the bailout, which is estimated to cost taxpayers as much as $600 billion, would primarily benefit wealthy people.
They also faulted it for being more out-of-control spending from the president and Democrats in Congress. Republicans insist that increased government spending is a key driver behind inflation.
Moderate Democrats, who historically are most closely aligned with Mr. Biden, have also begun to distance themselves from the plan.
Mr. Biden responded to critics on Wednesday, saying his administration is “taking an economically responsible course.”
“I understand not everything I’m announcing today is going to make everybody happy,” Mr. Biden said during a White House address. “But I believe my plan is responsible and fair. It focuses the benefit on the middle class and working families. And it will fix a badly broken system.”
• Joseph Clark can be reached at jclark@washingtontimes.com.
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