The cost of the Biden administration’s student loan bailout could exceed $1 trillion, according to a new analysis by the Penn Wharton Budget Model. This level of reckless spending will drive already-surging inflation.
On Wednesday, President Biden announced a plan to cancel $10,000 in student loan debt for borrowers making less than $125,000. Pell Grant recipients who make less than $125,000 would be eligible for $20,000 in cancellation. For couples that file jointly, the limit would be $250,000. The plan also extends the moratorium on student loan repayments until the end of the year.
Further, the plan imposes radical changes in income-driven repayment (IDR) rules. These changes would cap monthly payments to 5 percent of discretionary income, compared to the current rate of 10 percent. These changes would also raise the amount excluded from the calculation of discretionary income from 150 percent to 225 percent of the poverty line. IDR changes also include the federal government forgiving loan balances after 10 years of payments, instead of 20 years, if the balance of the account is less than $12,000.
Penn Wharton’s analysis finds that debt cancellation alone will cost up to $519 billion:
“We estimate that President Biden’s proposed student loan debt cancellation alone will cost between $469 billion to $519 billion over the 10-year budget window, depending on whether existing and new students are included.”
The analysis also found that a four month extension of the student loan repayment moratorium will cost $16 billion.
The analysis also finds that the changes to IDR rules could cost $450 billion or more, putting the total cost of this plan over $1 trillion:
“Under strict “static” assumptions about student borrowing behavior and using take-up rates within existing income-based repayment programs, the proposed new IDR program will cost an additional $70 billion, increasing total package costs to $605 billion.
However, depending on future details of the actual IDR program and concomitant behavioral changes, the IDR program could add another $450 billion or more, thereby raising total plan costs to over $1 trillion. These details require future study.”
This kind of spending will inevitably make inflation even worse than it is.
The federal government is already flooding the economy with so much money that demand is growing too fast for production to keep up. In July, inflation remained high at 8.5 percent. Inflation is costing American households an extra $635 a month. Even if prices stopped increasing altogether, the average American household will spend over $7,600 more this year due to inflation.
This is radically unsustainable. Certainly, spending over $1 trillion without paying for it will exacerbate inflation.
Low-income households are disproportionately harmed by inflation. Low-income Americans spend a much higher percentage of their income on basic goods. Under high inflation, higher income households cut back on luxury goods, while low-income households can’t cut out much of their spending, as their spending is primarily on necessities like housing and groceries (which high-income households can “stock up” on while prices are cheap).
Those who are most deeply harmed by inflation are those who didn’t go to college.
While most Americans – 87 percent of which do not have federal student loans – are living paycheck to paycheck, they must now subsidize the hasty financial decisions of those with college degrees and high earning potential. This move is unbelievably out-of-touch.