VSConservatives love to talk about the high cost of canceling student debt. In the words of the Committee for a Responsible Federal Budget, federal student debt cancellation, even means-tested, is “regressive, inflationary, costly, and would likely do more to raise the cost of higher education in the future.” only to reduce it. ”.
Or as Forbes recently put it, “Cancelling federal student loans will cost the federal government hundreds of billions of dollars – and the general public will end up footing the bill.” The author goes on to suggest that this “cost” imposed on taxpayers could threaten vital social programs like free and reduced lunch or any future hopes of universal pre-kindergarten or guaranteed parental leave.
These conservative clichés have flooded editorials in major news outlets in recent months.
But if Joe Biden signed an executive order tomorrow, the government won’t pay a dime, and those costs certainly shouldn’t be borne by ordinary taxpayers at the expense of programs like Medicare or Social Security.
This is because federal student loan debt is already included in the national debt. Let me explain.
The Department of Education (DoE) does not directly lend money to students. It borrows money from the US Treasury (the federal department that prints money) and then lends that money to students.
As the Urban Institute points out, federal student loan debt is already counted as national debt. This additional debt is added when the Treasury lends money to the DoE. In other words, it was the creation of student loans that added over a trillion dollars to the national debt.
The Urban Institute notes that while the national debt increases, the federal deficit decreases slightly as student loans are repaid. This is because when student borrowers repay their debts, they pay interest on the loan. Interest paid by borrowers exceeds Treasury interest rates. The DoE subtracts the difference and retains the “profit” to pay the administrative and servicing costs of these loans.
This system, for all intents and purposes, transformed the DoE, which directly holds and services about $1.5 billion in student loans, into one of the largest banks in the United States, behind Wells Fargo and Citigroup.
Because overseeing all of these loans is a huge administrative undertaking, the DoE pays third-party contractors like Nelnet — a publicly traded company with an estimated net worth of over $3 billion — to help service the loan. these loans.
If federal student loans were canceled by order in council today, the government wouldn’t be cutting a trillion dollar check to clear the debt from the national ledger.
Claims that student debt forgiveness is “expensive” are misleading, perhaps intentionally.
The “cost” the Tories are talking about is actually the loss of revenue from the payments borrowers would make on a monthly basis in the absence of relief. These monthly payments have been suspended since April 15, 2020 and the interest rates are set at zero. Proponents of student debt relief pointed to this executive branch action as a significant indication of Biden’s authority to write off student debt without going through Congress.
As Slate pointed out, it may be easier to think of student debt repayment as a “household tax, which slightly dampens consumer demand.” Households bear this tax in the absence of public funding for higher education. This tax is increased by both Treasury and DoE interest rates and paid on a monthly basis over an average of, by some estimates, 21 years. This tax is not due all at once.
Biden, through an executive order, can enact a “tax cut,” or an extended moratorium on student loans, ordering the DoE to cease collecting payments from borrowers indefinitely. These sweeping tax cuts have already been made.
In 2017, Donald Trump’s Tax Cuts and Jobs Act overhauled the tax code, permanently cutting the corporate tax rate by 40% and temporarily lowering personal taxes, significantly reducing government revenue.
The Congressional Budget Office estimated that these cuts would cost between $1,000 and $2,000,000 over a 10-year period, far more than would be owed by student loans over the same period.
An analysis of Forbes data by Americans for Tax Fairness and the Institute for Policy Studies determined that “American billionaires have become $2.1 billion richer during the pandemic,” which is equivalent to 60% of the cost in 10 years of Biden’s $3.5 billion rebuild. Plan better.
US bias toward abstract economic concepts like “deficit” and “inflation” ignores the reality of prolonged human suffering and comes down to how economic health is measured.
Does it measure up to the financial gains made by the 1% during a global pandemic that has claimed more than a million lives? Or is it the number of families and workers who managed to avoid eviction and poverty?
Will economic recovery from the pandemic be measured by how many employees companies are able to hire at minimum wage or how many Americans feel able to move forward and build their own life with salaries that cover their living expenses?
Trump argued that the tax cuts would pay off by catalyzing substantial economic growth. This has never been the case. Treasure of billionaires. Workers spend.
The International Consortium of Investigative Journalists’ 2021 Pandora Papers, and their 2016 Panama Papers before that, document an elaborate “shadow financial system” that billionaires use at the expense of the public. ProPublica’s 2021 IRS secret files detail how the ‘ultra-rich are effectively circumventing’ the US tax system, with billionaires like Jeff Bezos, Elon Musk, Mike Bloomberg and George Soros getting away with it without paying federal income tax. income in a given year.
If borrowers got a tax cut in the form of student debt forgiveness, that money wouldn’t be hoarded in offshore tax havens. It would be used to pay for living expenses, buy houses and start a family, vital indicators of a healthy human economy.
A 2018 macroeconomic analysis of student debt cancellation from the Levy Economics Institute of Bard College estimated that student debt cancellation could increase real GDP by an average of $103 billion to $130 billion annually or from $1.03 billion to $1.3 billion over 10 years (after adjusting for inflation). in 2022).
In Levy’s analysis, the money the Treasury lends to the DoE does not disappear. Instead, “existing passives will be carried over (i.e. a new [Treasury] a guarantee is issued to pay the one that comes due) and the debts incurred when the loans were originated simply become permanent”.
The national debt would increase relative to the debt service the DoE owes the Treasury over the life of the loan, not, as Levy points out, over the amount of the loans themselves.
In this equation, canceling student debt is not so much a “cost” as an accounting issue. It is about adjusting revenues to what is deemed fair and most beneficial to society. If we decide tomorrow that people’s lives are worth more than corporate profits, there is no public bill to pay. If corporate tax rates were set at previous rates and billionaires paid their fair share, there would be no cost.
Canceling student debt is not a solution to the student debt crisis. It’s an acknowledgment that somewhere down the line, something seriously went wrong. It’s a clean slate for millions of Americans to move on with their lives and seek a path to social mobility, the cornerstone of the American dream that higher education once represented.
In the long term, the United States must move away from the Byzantine system it currently uses to fund higher education toward a system in which all who benefit from the value of an educated workforce contribute to the initial investment.
Meanwhile, conservatives have created mass hysteria around the national debt burdening future generations based on the myth that the federal budget should be treated like a household budget. The reality is that the part of the national debt that is a real burden over several generations is a relatively small part of the nation’s overall balance sheet and can be taken from us tomorrow with a single signature.