Report: Student Loan Portfolio Would Reach Current Levels in Under 15 Years Following Widespread Debt Cancellation

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

Ben R | 7/13/2021 8:19:33 AM

John G: I'll provide this illustration. Compare the average debt to the average debt of a PSLF borrower. The average student loan is around $37,000 while the average loan in PSLF is around $100K. The mere promise of cancellation in this case, even with strings attached, is enough to encourage borrowing beyond what we would otherwise see.

Of course lack of graduate lending caps doesn't help and some of these borrowers would probably borrow just as much without such a promise, but with all else being equal I think it's fair to say it has encouraged some largess among that group.

John G | 7/12/2021 9:10:44 AM

Good comments, thank you.

Joel T: I was looking for proof which is expected from a source such as CRFB, but common sense does not always mean proof. I appreciate the note just the same.

Ben R | 7/9/2021 10:58:23 AM

I suspect the reason why the growth slope is the same under those different scenarios is that the payments coming in (pre-pandemic) had been barely keeping up with accruing interest (in aggregate). I believe annual payments were around $70 billion and annual interest and fees has been about $68 billion. Therefore, new loans accounts for most of the growth under all the different scenarios with the only difference being the length of time until the portfolio gets back to where it is now.

Joel T | 7/8/2021 2:30:23 PM

"I have yet to see any reliable support for these old assertions. Perhaps my colleagues can point me to it."

I believe common sense would be applicable. If the Congress decided to pay down $50,000 of every mortgage in the country in 2021 and you bought a house in 2022, I imagine you would assume that you should get $50,000 of your mortgage paid down as well. If not, you'd feel pretty slighted and would engage in advocacy so that you could receive what you believe is fair.

Student loan cancellation would perpetuate a never ending cycle of gripes and grumbles until all college is completely "free" - which I imagine is the ultimate goal of the proponents when you review those that are most vocal.

Peter G | 7/8/2021 10:35:17 AM

Just to clarify, the change in the overall value of the porfolio is not just new borrowing, it's roughly speaking [new borrowing + new interest and fees] - [payments received + forgiveness]. It's not clear to me how they arrive at the same slope of growth in all three scenarios given how different interest and payments would be in the portfolio in each scenario.

Peter G | 7/8/2021 10:29:16 AM

To John G's question, it's an assertion coming from an assumption that people would behave rationally, which is common in economics but not always how people behave.

I've always been very curious with these studies if they really bother to look at a) the impact that the Great Recession era borrowers in particular have on the overall behavior of the portfolio, and related b) broken out what percent of the portfolio's annual growth is coming from new borrowing vs. from accruing interest.

While the chart lacks important detail, visually they seem to projecting steeper rates of increase from 2022 on than what we have experienced from 2015 on, and it's not clear to me what that projection would derive from based on how they describe what they're doing, much less factoring in the reduction in outstanding principle.

John G | 7/8/2021 9:58:41 AM

"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."

I have yet to see any reliable support for these old assertions. Perhaps my colleagues can point me to it.

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