By Owen Daugherty, NASFAA Staff Reporter
If President Joe Biden were to use his executive authority to cancel all currently outstanding federal student loan debt, debt would return to the current level of $1.6 trillion by 2035 if no reforms were enacted to address the underlying issues that led borrowers to take out student loans in the first place, according to a new brief from the Committee for a Responsible Federal Budget (CRFB).
Furthermore, the CRFB report found that if Biden were to forgive $10,000 in federally-held student loan debt for each borrower — as he pledged when he was campaigning for the White House — debt would return to $1.6 trillion by 2025.
Should Biden follow Sen. Elizabeth Warren’s (D-Mass.) call to forgive $50,000 in student loan debt for each borrower, CRFB estimates the total level of student loan debt would reach $1.6 trillion by 2030.
“Importantly, these projections assume no change in borrower behavior. In reality, debt cancellation would likely lead to increased borrowing, slower repayment, and larger tuition increases as borrowers and schools would expect another round of cancellation in the future,” the report asserts. “Any behavioral changes would mean the portfolio would return even faster to its current size.”
However, it is worth noting that Biden — and Democrats pushing for widespread debt forgiveness — are not doing so without putting forth policies that they believe would address the root cause of the issue that led to tens of millions of borrowers holding higher levels of student loan debt.
Biden has called for making two years of community college tuition-free for all, regardless of income, and $80 billion for the federal Pell Grant program to increase the current maximum award of $6,495 by $1,400. The boost to the Pell Grant included in his American Families Plan proposal represents a “down payment” on Biden’s campaign commitment to double the maximum award.
In theory, should Biden’s higher education priorities come to fruition during his tenure, borrowers would not need to take out student loans at the current rate.
The CRFB used the $1.6 trillion figure as a metric for the purpose of the report seeing as how the total outstanding federal student loan portfolio is on track to exceed $1.6 trillion by the end of the fiscal year.
The report estimates that canceling $10,000 of student debt would reduce the portfolio to just under $1.2 trillion, while canceling $50,000 would reduce it to a little over $500 billion. Canceling the entire outstanding portfolio would bring the total to $0, though only temporarily, the report argues, at least until the next class of borrowers takes out loans.
The portfolio would again swell within just a few years due to lower balances resulting from debt cancellation, which would also reduce the pace of repayment relative to the current student loan portfolio, according to the report.
Additionally, the report expects the student loan portfolio to return to its current level, if not higher, due to the impact one-time debt cancellation would have on borrowers’ behavior.
“We expect one-time debt cancellation to lead to faster debt accumulation as borrowers expect a higher likelihood of further cancellation down the road,” the report states.
Pointing to a previously published CRFB report that argued widespread debt forgiveness would be regressive and do little to stimulate the economy, an assertion that is under debate and has been pushed back on, the new brief paints student loan debt cancellation as a “temporary fix” at best.
“Rather than blanket debt cancellation, policymakers should focus on reducing the cost growth associated with higher education itself,” the report concludes. “Such reforms could be coupled with targeted relief and support for borrowers and students with serious financial need or hardship.”
Publication Date: 7/8/2021