If loan forgiveness is extended over the next decade, the cost would be an additional $3.5 billion a year for new eligible borrowers.
The estimate includes the 10-year window to give policymakers an idea of the additional cost for those who would just miss the cut-off if forgiveness was given this year, says Kent Smetters, faculty director for the Penn Wharton Budget Model.
Given that students with loans who are currently in school qualify for the forgiveness (if they or their parents meet the income requirements), there are likely to be additional costs in the next few years at least.
The administration reportedly included an income cap to appease critics who say high earners do not need student loan debt forgiveness. Without the cap, $10,000 in forgiveness would cost an estimated $311 billion or $344 billion for 10 years of eligibility.
Although $10,000 in forgiveness is welcomed by many of the estimated 43 million federal borrowers, some progressives have pushed for greater relief, including up to $50,000 per borrower. Doing so would cost an around $980 billion over 10 years, Penn finds.
Forgiving $10,000 in debt per borrower would also disproportionately help wealthier households, according to the Penn analysis. Between 69% and 73% of the debt forgiven would belong to households in the top 60% of the income distribution.
That said, with the reported income cap, the top 10% of households by income would receive less than 2.5% of the benefits. The Biden administration estimates 90% of the relief will go to those earning less than $75,000 a year.
Smetters says relative to other means-tested programs like the Supplemental Nutrition Assistance Program (SNAP) that help lower-income Americans by definition, federal student loan forgiveness would skew to higher earners.
“Who has student debt? In some cases it’s students who have separated from deferred status and don’t have a college degree,” he says. “But in many cases it’s those who have a college degree” and are higher earners as a result.
There are already existing programs to help low-income Americans get their federal loans forgiven, says Smetters, including income-driven repayment plans. The struggle is getting more people to enroll in them.
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