Earlier this week, the President announced the Administration’s plan to forgive student debt for those who need it most.
One way to assess the “cost” of student loan debt relief is by focusing on the impacts to expected annual student loan repayments. This effect on “cash flows” is distinct from the official budgetary impact (discussed further below), however the cash flow effect is what matters when it comes to federal borrowing and the national debt. Since many borrowers pay off their student loans over several years, if not decades, the annual impact from reducing or eliminating those loans on federal borrowing is spread out over a lengthy period of time.
Assuming a take-up rate of 75 percent, we estimate that over the decade from 2023-32, the average cash flow impact will be approximately $24 billion annually. This estimate is based on data from the Department of Education, and would necessarily change based on new data on actual take-up and several other factors.
This estimate does not include the positive cash-flow effects of student loan borrowers returning to repayment in January 2023—a decision the Administration announced earlier this week alongside its debt relief actions. While the payment restart will bring in billions of dollars of payments each month relative to the current payment pause, that cash flow is already accounted for in our budget baseline. That means both we and other scorekeepers, like the Congressional Budget Office, expected these payments to resume before the new student debt plan was announced.
The fact that payments from restart are in the budget baseline is important to avoid taking undue credit in our budget for payments we already expected to receive. But the logic is very different when considering the impact of targeted debt relief on inflation. In that case, as many outside analysts have pointed out, the fact that many borrowers will resume monthly payments on their debt is expected to reduce their spending relative to the period during which their payments were paused. As Goldman Sachs analysts put it, “debt forgiveness that lowers monthly payments is slightly inflationary in isolation, but the resumption of payments is likely to more than offset this.”
Multi-Year Budgetary Impact
As required by the Federal Credit Reform Act of 1990 (FCRA), the costs of Federal lending programs are estimated on a net present value basis, not on a cash flow basis. Net present value analysis accounts for the fact that forgoing $100 you would expect to receive some years in the future is less costly than forgoing $100 today. According to FCRA, the cost of modifying existing loans, such as by forgiving debt, must include an assessment of how much less borrowers would pay over the life of the loan (which could stretch well beyond the standard 10-year budget window). For budgetary purposes, the net present value of that lost revenue is included in the year the loan is modified—not over the life of the loan.
The Department of Education is working with the Office of Management and Budget to finalize this score. The score will depend on many different variables, including interest rate projections, the percentage of borrowers who successfully apply for debt relief, the number of borrowers in different types of repayment programs who receive relief, and the borrowers’ likelihood of repaying their loans before and after deft relief. The official score will then be adjusted, based on actual data about take-up and other factors, during the annual budget process next year. (The score for the Education Department’s proposed rule creating a new income-driven repayment plan, which the Administration also announced this week, will be provided once the rule is finalized, later this winter.)
As noted above, this score will show the long-term cost to the government, which will include costs that extend beyond the usual 10-year budget window. As a result, comparing this score to the 10-year score of other policies—such as the Inflation Reduction Act (IRA)—is misleading. A more instructive comparison would be to compare the score of the Administration’s targeted debt relief plan to the lifetime savings from the IRA, or at least the two-decade savings that bill will produce.
This Administration’s track record of fiscal responsibility is second to none. The Administration reduced the federal budget deficit by $350 billion in its first year, and were already heading toward $1.7 trillion in deficit reduction this year. Even as we provide this much-needed relief to 43 million borrowers, the deficit reduction this year will be the largest in history. The enactment of the IRA—which is projected to reduce the deficit by roughly $1 trillion over the next two decades—will further improve our fiscal trajectory.
Against this backdrop, the President believes we can afford to provide targeted relief to more than 40 million lower- and middle-income student loan borrowers. Nearly 90% of this relief will go to borrowers making under $75,000 a year, and no relief will go to any individual or household in the top 5% of incomes in the country. This will give millions of working families a little more breathing room as loan payments restart, and strengthen our economy for years to come.