President Biden’s plan to forgive between $10,000 and $20,000 of student loan debt for borrowers making less than $125,000 a year is actually a win-win scenario, according to Daniel McKeever, assistant professor in the School of Management at Binghamton University, State University of New York.
“Many people don’t realize that the federal government actually owns (not just guarantees) almost all student loan debt as a result of a provision in the Affordable Care Act of 2010. On paper, these loans are currently worth about $1.5 trillion dollars. Joe Biden just forgave loan balances totalling about $330 billion. So did American taxpayers just fork over $330 billion in new spending? And will we get clobbered with a new round of inflation as a result?
“Not at all. While the federal government’s student loan portfolio might be worth a lot on paper, these loans are basically junk bonds, with default rates around 25% and no collateral to recover. The government’s loan portfolio is a loser: it actually costs the government more to service these loans (especially among the worst-performing loans to borrowers who will simply never be able to repay them) than the government will ever collect in interest. Writing off the worst of these loans actually improves the federal government’s fiscal outlook and saves taxpayers money. This isn’t $330 billion in new spending, it’s a small spending cut.
“Biden’s cancellation program zeroed the loan balances for about half of the 45 million Americans with federal student loan debt by eliminating up to $10,000 for all borrowers below a modest income threshold, and up to $20,000 for Pell Grant recipients. This amounts to a highly-targeted form of economic stimulus for lower- and middle-income households: wealthy people generally don’t take out student loans, and borrowers with extremely large loan balances are usually employed in correspondingly lucrative fields, like medicine or law. The Department of Education estimates that 90% of the borrowers who will receive full or partial cancellation of their student loan balances are earning less than $75,000 per year. This debt forgiveness program provides serious relief to the balance sheets of low- and middle-income households. In the longer term, it also frees those borrowers up to improve their credit score and pursue other forms of credit (mortgages, auto loans, and so on). Right now, interest rates are high enough that expanded access to credit is unlikely to create significant inflation.
“The student loans that this program eliminates were a lose-lose: the government slowly bled money on bad loans, and the borrowers were saddled with debt that most of them could never hope to repay. There was no reason to keep them on either party’s books, and so wiping them off is a win-win.”
