The Winners and Losers of Student Loan Cancellation

President Biden recently announced that he will cancel federal student loan debt owed by millions of Americans via executive order. Biden said this program will “help America win the economic competition of the 21st century.”

Despite the positive spin from politicians, there are many problems with the Biden plan. Student loan cancellation is a simple transfer program that gives money to a small group of borrowers at the expense of all American taxpayers. Contrary to the claims of its supporters, most benefits will go to middle- and high-income borrowers. Cancellation may encourage students to borrow more than they can afford with the knowledge that those loans may never need to be repaid.
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According to the initial details, the plan would cancel up to $10,000 for student borrowers and $20,000 for low-income borrowers who received Pell Grants. The program would be limited to individuals with incomes less than $125,000 ($250,000 for couples), which is over 3.5 times the national median income. Estimates from the Penn Wharton Budget Model put the total cost of the program at around $300 billion.

In addition, loan cancellation will also be available to some parents who borrowed through the Parent Plus program. It would lower the costs for borrowers who chose income-based repayment plans and expand the Public Service Loan Forgiveness Program. The post-Covid freeze on all federal student loan payments will also be extended.

Critics have pointed out many disadvantages to student loan cancellation, especially when conducted by executive order.

Canceling federal student debt does not eliminate the debt. It merely passes the costs to taxpayers. It’s a wasteful, inefficient way to subsidize low-income borrowers. Of course, paying them subsidies directly would require Congressional approval, which is presumably why Biden has chosen to conduct this action by executive order.

The precedent of cancellation by executive order also creates perverse incentives for future borrowers, who might now expect their debts will eventually be forgiven as well. They may respond by borrowing more and pursuing less productive majors. They will be more reluctant to pay back their loans quickly even when they are capable, as doing so would eliminate the potential benefit should calls for forgiving student loans succeed again.
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