Rumored Student Loan Cancellation Would Cost $230 Billion

Press reports indicate that President Biden could soon announce a plan to cancel at least $10,000 in debt for the vast majority of student loan borrowers. Based on current plan details, our rough estimates suggest that cancelling $10,000 in debt for households making less than $300,000 (or individuals making less than $150,000) will cost $230 billion (down from $250 billion with no means test).  Cancelling $20,000 in debt with the same means test would cost $480 billion.

means-tested student debt cancelation is still costly

The means-tested version of $10,000 in debt cancellation would eliminate approximately $360 billion in debt at a cost of $230 billion. The reason that the estimated cost is lower than the total amount cancelled is because some of this debt would have been forgiven anyway, especially through existing income-driven repayment programs. Our cost estimate assumes a 100 percent uptake rate of eligible borrowers; depending on how burdensome or complicated the eventual process from the Department of Education is, the ultimate uptake rate could be lower, which would, in turn, lower the cost.

Cancelling $20,000 in debt with the same means test requirements would eliminate about $600 billion worth of debt at a cost of roughly $480 billion and would completely eliminate the debt of almost 50 percent of borrowers. Note that these estimates are more difficult to calculate than $10,000 due to a lack of available data and should be interpreted cautiously. These costs would be on top of the $130 billion cost of the 29-month pause on student loan repayment initiated at the beginning of the pandemic and currently set to expire in August.

Altogether, $360 billion to $610 billion could be added to the national debt as a result of the pandemic-related pause and subsequent cancellation.

Both the payment pause and cancellation are regressive and inflationary. This would be a poor policy, and the Administration should not pursue it.