Biden Plan Forgiving Student Loans Costs Taxpayers

President Biden has approved partial federal student loan forgiveness for nearly 43 million borrowers. Post-secondary student loans help some pay for trade school, college, and university educations. The federally subsidized and guaranteed loans benefit public and private institutions.

I do not support loan forgiveness unless it is accompanied by reforms that prevent a cycle of debt financing and federal bailouts.

Partial forgiveness helps a lot of people while leaving many with significant debt. If an individual has $10,000 or $20,000 of a $50,000 debt waived, this reduces future payments based on interest. As with any debt, paying off a portion always helps the borrower.

Yet, unlike most debts families owe, federal student loans are backed by the United States. Federal budgets assume repayment of these loans and the interest. When student loans are forgiven, the costs incurred must be covered by taxpayers.

The Congressional Budget Office and White House officials estimate 43 million student loan borrowers receiving some loan forgiveness will lead to a $600 billion cost and trigger up to 1% in additional inflationary pressures, which might compound.

An unintended consequence some borrowers might not anticipate: loan forgiveness is taxed by many states. Give taxes are also at higher rates than income taxes in a handful of states. Imagine the surprise of someone having their $18,000 or so in outstanding debt waived, only to get hit by a high tax rate.

All of these factors are why this decision was neither easy nor a safe choice. If it does correlate to a spike in inflation, while adding to the national debt, that’ll have a political price. If borrowers get hit with tax penalties, that might hurt the economy (and the president), too.

If the effects are negligible, then the debate is an easier win for Biden. If inflation spikes, then there could be a political price.

We won’t know the outcome, fiscally or politically, for a year or more.