President Joe Biden's student loan forgiveness is set to cost as much as $400 billion, making it one of the most expensive plans in the president's agenda.
According to a new estimate by the nonpartisan Congressional Budget Office (CBO), the policy is expected to increase federal budget deficits significantly over the next decade and beyond.
The CBO added that this figure could rise by a further $20 billion due to Biden's plan to extend the pause on federal student loan repayments until the end of the year.
The Biden administration has also committed to lowering the maximum monthly repayments for student loans from 10 percent of income to 5 percent.
This reduction is expected to cost an additional $120 billion according to estimates from the Committee for a Responsible Federal Budget (CRFB), a think tank advocating for lower deficits that has opposed Biden's plan.
Marc Goldwein, senior vice president at the CRFB, told The Washington Post: "The president announced possibly the most expensive executive action in history without a score, and we're now seeing just how expensive this policy is going to be."
The plan's roughly $420 billion price tag is equal to the cost of the stimulus checks that were given to Americans at the start of Biden's presidency. Goldwein said it was also expected to exceed the savings Democrats achieved in the recently approved Inflation Reduction Act.
How Is the Student Loan Forgiveness Plan Being Paid?
Some 45 million people are estimated to owe a collective $1.6 trillion in student debt.
Over 40 million Americans are expected to receive some student loan relief under Biden's plan, with 60 percent of borrowers expected receive $20,000 in relief, with up to half seeing their debt canceled entirely.
The canceled federal student loans costs are expected to be immediately added to the federal deficit—measuring how the country owes more money than it takes in during a year.
The CBO estimated the federal government ran a deficit of $217 billion in August—the difference between $304 billion in revenue and $521 billion in spending.
The federal government borrows money by selling Treasury bonds, bills, and other securities in order to pay for this deficit, which in turn increases the national debt.
The annual deficit and total debt accumulated over the years have recently risen to high levels, mostly due to the Covid-19 pandemic response. The Treasury reported that for fiscal year 2020 the U.S. deficit hit $3.13 trillion.
The country's debt was then estimated to have outpaced the size of the economy, coming in at roughly 102 percent of GDP, according to calculations from the CRFB.
This figure had not been that high since 1946, following World War II when it hit 106 percent.
How Will This Increased Deficit Affect Americans?
Analysts generally expect that the canceling of federal student loans will increase the deficit, which can become a cause for concern among Americans who fear how the decision may impact their personal finances.
How much could I get in student loan forgiveness?
Nearly 8 million borrowers qualify for automatic student loan forgiveness and won't need to apply for the forgiveness.
The remaining 35 million borrowers will need to submit their applications in the coming month.
If you received the Pell Grant to support your education costs, you will be eligible for up to $20,000 in forgiveness.
If you did not receive the grant, you may still be eligible for $10,000.
To qualify you must have a 2020 or 2021 Adjusted Gross Income (AGI) of less than $125,000 per annum, or $250,000 on a joint income.
You can find this on the front page of your tax return, known as a Form 1040.
Some experts have expressed worry over the negative effects this debt can have on the economy, making it vulnerable to rising interest rates and inflation.
Others have said there is little need to worry, as the government has run on a deficit every year since 2001 without many adverse effects.
Typically, the government has two options for recouping the deficit: decrease spending or raise taxes, which is how the plan is expected to impact the average American.
Spending cuts could affect such programs that enable free and reduced school lunches or could be achieved by raising the retirement age for Social Security.
The National Taxpayers Union (NTU), a fiscally conservative advocacy group, estimated that the pricey plans to cancel student loan debt could cost each U.S. taxpayer on average $2,500.
It's worth considering that this plan does not mean taxpayers will immediately see their taxes increase by $2,500 in higher taxes. The NTU also noted the costs would not be spread evenly since higher-income taxpayers would pay more then those with a lower income.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
About the writer
Emilia Shovelin is Newsweek's Personal Finance Reporter based in London, UK. Her focus is reporting on U.S. personal finance, property ... Read more
