One small change in the way the Department of Education (DOE) enrolls borrowers into income driven repayment (IDR) plans could cause the expected cost of President Joe Biden’s student loan forgiveness plan to skyrocket to $1 trillion dollars, according to a Friday analysis.
Biden’s plan, detailed in a fact sheet released by the White House on Thursday, will change IDRs by cutting monthly payments in half, to 5% of discretionary income, forgiving unpaid balances after 10 years instead of 20 for those who originally borrowed $12,000 or less, and raising income not counted towards discretionary income to 225% of the poverty line, up from 150%. Over the next ten years, these changes will cost the government approximately $70.3 billion dollars, on top of between $469 billion to $519 billion in costs from debt cancellation, and approximately $16 billion this year from ongoing loan payment pauses, bringing the total estimate for the cost of the plan to approximately $600 billion, according to the University of Pennsylvania’s Penn Wharton Budget Model (PWBM). (Related: ‘Reckless’: Obama Economist Tears Apart Biden’s Student Loan Forgiveness)
However, this estimate assumes that the administration makes no further changes to IDRs and that the current share of borrowers that are borrowing under IDR plans remains the same, the PWBM reported. If the DOE changed the IDR program to be opt-in rather than opt-out, additional costs from new enrollees could exceed $450 billion, up from the original estimate of $70 billion, pushing the minimum ten year estimate of the new policy’s cost above $1 trillion, the PWBM reported.
In-Box: Penn-Wharton budget model says, depending on behavior responses, cost of Biden student loan plan could exceed $1 trillion over ten years. Debt cancellation by itself could be up to $519 billion. https://t.co/X8tM1TSEbI
— Glenn Kessler (@GlennKesslerWP) August 26, 2022
Even if the DOE does not make this change, the new features of IDRs may encourage greater enrollment, even by borrowers who eventually expect to be priced out of eligibility as their incomes rise, according to the PWBM. This would also lead to increased costs for the government, but the PWBM does not make any specific estimates regarding the potential cost of increased enrollment, citing a need for future study.
PWBM’s estimate of the cost of student loan forgiveness is roughly double the $230 billion estimate made by the Committee for a Responsible Federal Budget (CRFB) that assumed $10,000 of forgiveness. Former Obama administration economist Jason Furman on Twitter Thursday said the CRFB’s estimate would need to be doubled to get a better estimate of the costs of debt forgiveness after the administration unexpectedly doubled its offerings to $20,000 of forgiveness in some cases.
The White House did not immediately respond to a Daily Caller News Foundation request for comment.
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