With his original plan for writing off billions of dollars in student loans undone by the Supreme Court, President Biden has a more modest workaround in mind. But that scheme, based on adjustments to existing income-driven repayment plans, faces not only renewed legal challenges and a bureaucratic gauntlet on its way to implementation, but estimates that the ultimate price tag will be $475 billion—much higher than originally expected. In other words, be ready for an already spendthrift federal government to burden taxpayers with yet more debt.
"The Department of Education (Department) today will begin notifying more than 804,000 borrowers that they have a total of $39 billion in Federal student loans that will be automatically discharged in the coming weeks," the U.S. Department of Education announced last Friday. "In total, the Biden-Harris Administration has approved more than $116.6 billion in student loan forgiveness for more than 3.4 million borrowers."
"It's now the most generous repayment program ever," commented President Biden.
As Reason's Emma Camp noted when the plan was announced, "Under most IDR plans, borrowers pay a specific percentage of their income each month for a set number of years—usually 20 or 25 years—after which their remaining balance will be forgiven. Previously, payments were required to be on time and in full in order to count toward cancellation." With the Biden administration's "Saving on a Valuable Education" (SAVE)-branded changes, many borrowers will be considered to have satisfied the requirements for forgiveness according to a broader set of circumstances, including late or partial payments, during periods of forbearance and deferment, and because of economic hardship.
Hefty Price Tags
Writing off loans comes at a price. The broader original loan forgiveness plan was estimated by the Congressional Budget Office to cost $400 billion, while the University of Pennsylvania's Penn Wharton Budget Model pegged it to cost at least $605 billion – with a warning that "total plan costs could exceed $1 trillion."
But the Supreme Court said that larger proposal abused the concept of discretion in applying existing law without seeking legislative changes through Congress. "The Secretary's plan has 'modified' the cited provisions only in the same sense that 'the French Revolution "modified" the status of the French nobility'—it has abolished them and supplanted them with a new regime entirely," Chief Justice John Roberts wrote in the court's majority decision.
That leaves us with the Biden administration's consolation prize for those seeking debt forgiveness. While not as far-reaching as the first plan, it's still spendy.
A Modest-Ish Proposal
"We estimate SAVE will incur a net cost of $475 billion over the 10-year budget window," the University of Pennsylvania's Penn Wharton Budget Model announced this week. "About $200 billion of that cost will come from payment reduction for the $1.64 trillion in loans already outstanding in 2023. We estimate that about 53 percent of the current loan volume will move to SAVE after it goes active in July 2024, implying that about $869 billion will be subject to enhanced subsidies under SAVE. The remainder of the budget cost, or about $275 billion, comes from reduced payments for about $1.03 trillion in new loans that we estimate will be extended over the next 10 years."
An earlier estimate by Penn Wharton had put the cost of Biden's income-driven repayment plans at "between $333 to $361 billion over the 10-year budget window." The higher new cost estimate takes into account the administration's final regulations, which were published on July 10.
The Congressional Budget Office (CBO) estimated in March that the "new income-driven repayment plan would increase the government's costs for federal student loans originated through 2033 by $230 billion." But that estimate also predated the publication of SAVE's final regulations. The CBO has yet to update its estimate for the plan's costs.
A Deep Sea of Red Ink
A price tag of $475 billion is less than the $605 billion projected for the scheme rejected by the Supreme Court, let alone the trillion-dollar-plus worst-case scenario envisioned by Penn Wharton, but it's a hefty chunk of change for a government that, year after year, spends well beyond its means. The latest U.S. Treasury Department Monthly Treasury Statement shows that the federal government borrowed almost $1.4 trillion in the nine months since Fiscal Year 2023 began last October. That's more than was borrowed in all of Fiscal Year 2022, though that year's red ink was also quite impressive.
Officially, total U.S. national debt is now $32.54 trillion.
"Our debt addiction of more than $5 billion per day will be hard to come down from, but it is vital that we do so for both current and future generations," comments Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "As of this month, we've now spent more on interest on the debt than we did for the entire previous fiscal year, and we are projected to spend more on interest payments in the next decade than we will on the entire defense budget. We're on track to have interest be the single largest line item in the budget by 2051 – larger than our two current biggest programs, Social Security and Medicare."
In the context of such overwhelming debts and deficits, it might be tempting to ask, what's another $475 billion among fellow countrymen who don't like each other very much? But that's not how we dig ourselves out of this hole. In May, during the debt ceiling debate (remember that?), I tried my hands at a few online tools that let Americans make decisions for balancing the federal budget. The tools varied in assumptions and overall quality, but (spoiler alert!) no approaches for eliminating red ink involved multi-hundred-billion-dollar giveaways.
The SAVE plan and its associated costs aren't yet fixed in stone. Among other considerations, it's likely to face a new round of lawsuits from people concerned that the administration is yet again making expensive policy decisions without seeking congressional approval. However, the financially less-ambitious scheme is also not as creative in its legal gymnastics as the original proposal and may not be so vulnerable to challenge.
So, the estimated $475 billion price may stand as an addition to the federal government's already excessive financial undertakings. It's a generous proposal, all right, not just in terms of taxpayer money, but also in the burden it places on the country's shaky financial future.
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