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In June, the Supreme Court struck down the White House’s plan to cancel $430 billion in student loan debt. Biden’s debt cancellation plan would have been the biggest student debt handout in history, had it not been wildly unconstitutional.
Undeterred, the Biden administration has rolled out smaller debt relief programs in the wake of the Supreme Court’s decision, and it has announced that it is in the process of developing an even larger debt cancellation plan in the near future, one that will likely also be challenged in court.
However, as important as these legal and political battles are, a much more significant policy has also been put into place by the White House. And unlike the others, it has received very little attention from the press or members of Congress. If it is allowed to remain in place, it will cost, at minimum, hundreds of billions of dollars over the next two decades. Over a long enough period, it will likely surpass $1 trillion, making it the most expensive debt cancellation plan ever created.
The reason so few people are talking about the new debt cancellation plan is because it’s buried in a new student debt repayment plan. Additionally, the debt forgiveness would happen over time, not in one fell swoop.
The new repayment plan is called Saving on a Valuable Education (SAVE). It’s a type of income-based repayment plan that allows students with education debt to repay their loans based on income, rather than a fixed monthly amount.
Income-based repayment plans have been around for more than a decade, but key parts of SAVE make it unique and costly.
SAVE increases the income floor required for payments, from 150 percent of the poverty line to 225 percent, which means more borrowers who would otherwise be required to make payments will end up with bills totaling $0 per month. That change will also reduce the amount of income considered by the government when calculating payments for all borrowers in the plan, lowering bills for nearly everyone enrolled.
Further, the SAVE plan eliminates all remaining interest for subsidized and unsubsidized loans, and it excludes spousal income for those borrowers who file their taxes separately.
In total, the SAVE plan will dramatically reduce the amount of money many borrowers must repay each month and over the life of their loans.
On the surface, these policy changes appear to be limited to impacting monthly payments. But a deeper look shows that they will also have a substantial impact on loan cancellation as well.
Current law obligates the federal government to cancel student loan debt after a designated period — 20 years for undergraduate loans and 25 years for graduate loans — regardless of how much has been paid back by the borrower.
Because the SAVE plan dramatically reduces the monthly payments for many borrowers and eliminates interest, the number of people who will never pay back the balance of their loans over the 20- or 25-year periods will skyrocket.
According to an analysis by the Urban Institute, Biden’s SAVE plan will cause sweeping loan forgiveness for undergraduate debt holders.
The researchers wrote, “If all certificate and associate’s degree recipients were enrolled in current [income driven repayment plans], we would expect 62 percent to fully repay their loans (assuming typical debt levels). Under the Biden plan, only 11 percent would fully repay before reaching forgiveness.”
The Urban Institute further estimates, “The Biden plan would have a similar effect for bachelor’s degree recipients. The share fully paying off their loans would fall from 59 percent under current [income driven repayment plans] to 22 percent, and the share repaying no more than half of what they borrowed would increase from 22 percent to 49 percent.”
That means under the SAVE plan, about 78 percent to 89 percent of all undergraduate student loan borrowers will receive some kind of debt cancellation, and one out of every two borrowers will pay less than half of their debts before receiving forgiveness.
The Urban Institute’s conclusion is in line with estimates made by the Biden administration. It found that under the SAVE plan, the average amount of debt repaid for every $10,000 borrowed would fall from an average of $10,956 under the current model to $6,121. That means under Biden’s plan, the average student loan borrower will end up receiving huge amounts of loan forgiveness.
How much will this gigantic government scheme cost American taxpayers? Federal officials claim the SAVE plan will cost an additional $138 billion over the next 10 years. The Congressional Budget Office, however, says the cost is closer to $230 billion, and the Penn Wharton Budget Model estimates the cost to be $361 billion over a decade.
Although these estimates are immense, they are almost certainly nowhere near the true cost of the plan. Because there is no sunset for Biden’s new repayment policy, and because the existing cost estimates don’t consider the large amounts of debt that will be forgiven in the years well beyond the decade-long study period, the cost will ultimately be much larger than any of the 10-year estimates.
Perhaps more importantly, many researchers have yet to include in their studies the cost of additional borrowing. Once students realize that half or more of their student loan debt will almost certainly be covered by taxpayers, they will likely increase their spending on tuition and cost of living.
With these factors in mind, given enough time, the SAVE plan will likely cost far more than $1 trillion.
Biden’s SAVE plan is one of the most radical, deeply unfair, socialistic policies in decades, and unlike Biden’s other student debt cancellation proposals, there’s very little chance the Supreme Court will block it. Only members of Congress have the power to stand up to this out-of-control administration.
The biggest question that remains is, will they?