The Hidden Cost of Student Loan Forgiveness

The Hidden Cost of Student Loan Forgiveness

The headlines on President Biden’s student debt forgiveness plan have focused on the breadth and the cost. As many as 37 million loan-holders may qualify for some relief, which would forgive about $400 billion in debt at the expense of taxpayers.

But the president’s plan also does something just as consequential that you probably haven’t heard about.

In 1994, Congress created an income-contingent repayment plan that let borrowers pay 20% of their annual income each year for 25 years, at which point all remaining student debt would be forgiven. Those at or below the poverty line would be exempt from repayment entirely.

Biden’s new plan would raise the exemption rate to 225% of the poverty line, exempting millions more borrowers. The plan would also lower and shorten the repayment scheme so borrowers would have to pay just five percent of their annual income each year for 10 years.

Andrew Gillen of the Texas Public Policy Foundation calculates that the average bachelor’s degree recipient would only have to pay $68 per month — about the cost of high-speed internet or a premium cable package. After 10 years, this borrower would have paid back just $8,160, and would have the remainder of their debt forgiven.

And the amount to be forgiven would continue to grow. With borrowers knowing their real cost was less than that of a used car, colleges can continue to boost prices. The average full cost of a four-year degree at a public institution has risen from $14,800 in 2000 to $23,300 in 2010 to $37,600 today. A radical rejiggering of the income-contingent repayment plan would accelerate those price hikes — with taxpayers, not borrowers, paying most of the bill.