Enrichment Education

What happens if Biden cancels student loans?

Story at a glance

  • President Biden has renewed the pandemic-related pause on student loan payments three times during his presidency.
  • If Biden can forgive some student loan debt, it’s unclear how the government will pay for it and what could immediately happen to the economy.
  • Lawmakers and debt advocates suggest loan forgiveness would immediately boost the economic outlook for millions, offering a path toward financial security — especially for historically marginalized groups.
  • Experts say the money freed from debt won’t immediately go into the economy, questioning from a policy standpoint where the money to pay for student debt forgiveness might come from.

President Biden has renewed the pandemic-related pause on student loan payments three times during his presidency, as calls to issue blanket loan forgiveness grow louder. If it is determined the president has the authority to forgive some student loan debt, it is unclear how the government will pay for it and what could immediately happen to the economy. 

Biden said on the campaign trail and early in his presidency he was open to eliminating at least $10,000 in student debt per borrower. Since then, prominent lawmakers, including Senate Majority Leader Charles Schumer (D-N.Y.), have been urging the president to act on and take his campaign promise further by canceling up to $50,000 of student debt per borrower. 

The administration is unsure whether Biden holds the legal authority to issue blanket student debt forgiveness and previously asked the Education Department to review whether the president can cancel payments. Advocates argue that today’s payment freezes have set the legal basis to forgive loans with an executive order.  

An estimated 43 million people hold student loans, collectively totaling around 1.6 trillion, with the average borrower owing around $36,000. Lawmakers and debt advocates suggest loan forgiveness would immediately boost the economic outlook for millions, offering a path toward financial security — especially for historically marginalized groups. But experts say that the money freed from debt won’t immediately influence the economy and they question from a policy standpoint where the money to pay for student debt forgiveness might come from.

Economic impact 

Some lawmakers have argued loan forgiveness would act as an economic boom, potentially infusing billions immediately into the nation’s GDP.  

That would be a relief to countless borrowers as a national poll by CNBC found 62 percent of U.S. adults said federal student loans negatively affect their mental health. Debt hasn’t affected Americans equally either, with CNBC’s poll finding 24 percent of Black adults reporting they have federal student loan debt, compared to only 14 percent of white adults. 

But Adam Looney, a fellow at Brookings Institution and executive director of the Marriner S. Eccles Institute at the University of Utah, said any change would not be felt right away.  

“It’s not like you get a check, a stimulus when the federal government enacts a trillion-dollar COVID relief plan that’s a trillion dollars and it goes into people’s pockets, and they get to spend. Student debt relief, it trickles out over the course of a decade or more,” Looney told Changing America.  

Yet Thomas J. Vicino, associate dean of graduate studies and a professor of political science at Northeastern University, said that no longer having a monthly student loan payment could free up $300 a month more immediately. While it’s not clear how Americans will choose to spend or save that money, Vicino says many borrowers put off buying a home or car or even starting a family — all of which carry long-term consequences for the economy.  

“If you actually go out and then spend it, you go buy more, you might buy a car more quickly than a house,” Vicino told Changing America. “So, any sort of economic behavior that we would see would have an impact. If people just save the money, and save for a down payment on house, that’s the long term.” 

Legal consequences are also likely, as Vicino suggested the more student debt the president tries to cancel, the greater the chances of a legal contestation. A president canceling student debt stirs up larger questions around the government’s authority to enforce, pay, compromise, waive and release these loans. 

Instead of leaning on Congress to find a solution, Biden could issue an executive order, and “we can see if it stands up to a potential legal challenge,” said Vicino. 

Financial cost 

If the Biden administration concludes it holds the legal authority to issue blanket student loan forgiveness, the cost will vary depending on how much debt is forgiven per borrower. Looney analyzed data from the Department of Education and found forgiving all outstanding federal student loans would cost $1.6 trillion.  

Forgiving student debt up to $50,000 per borrower would cost about $1 trillion. If Biden follows through on his campaign promise and forgives $10,000 per borrower, that would cost the federal government about $373 billion.  

In total, 43 million borrowers could benefit from some form of blanket debt forgiveness. 

Looney points out that if Biden chooses to forgive all $1.6 trillion in federal student loan debt, it will become the costliest social spending initiative — outpacing unemployment insurance, the earned income tax credit and food stamps.  

Looney says “there’s not an obvious offsetting legislative tax increase.”  

“But you know, it’s a trillion dollars that adds to the national debt. It increases the amount of debt service, the debt the federal government has to spend servicing the debt,” Looney said. 

“That means that there are fewer resources available to other spending programs, and higher taxes will be required in the future. So, there are real tradeoffs in a sense of, there is a budget and so the more you spend on one program, the less you have available to spend on other programs,” he added. 

But the federal government isn’t the only institution that handles student loans. Though the government issues and owns about 92 percent of student loan debt, the remaining amount is owned by private banks and simply managed by the government. This is known as federal family education loans (FFEL). If the president has the ability to move forward with some level of student debt forgiveness, both loan programs would need to be addressed.  

This makes issuing blanket student debt forgiveness a contentious issue, Vicino says. 

“It’s like erasing debt on the balance sheet. Whereas the federal FFEL, they are not direct loans, the overwhelming majority of that $250 billion is actually held by private banks. We’re just talking about erasing dollars and that is easier to do because you don’t need any transfer to a private bank from the direct loan program,” Vicino said. 

Those FFEL loans may also influence how Biden could come to terms with debt forgiveness — by simply erasing outstanding debt and taking it as a loss or using federal dollars to pay off outstanding balances. 

Where the country stands now 

While the president waits on the Education Department to determine the future of blanket student debt forgiveness, his administration has made significant strides to address the crisis.  

Not only has Biden continuously extended the federal moratorium on federal student loan payments, which began during the Trump administration, his education department also approved nearly $2 billion in relief for more than 107,000 borrowers via borrower defense claims.  

The department announced a policy change last year that discharged at least $5.8 billion in student loans of more than 323,000 borrowers who have a total and permanent disability. The Public Service Loan Forgiveness (PSLF) program was also overhauled, reviewing previously denied PSLF applications and giving borrowers the opportunity to have their determinations reconsidered.   

The Education Department estimated that 22,000 borrowers who were previously deemed ineligible for PSLF immediately became eligible for $1.74 billion in loan forgiveness — without any further action needed on their part.