Canceling Student Loan Debt Would Not Make Government Money

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The claim: the federal government would have more money if it canceled student loan debt

Since President Joe Biden took office, his administration has canceled billions of dollars in student loan debt. More recently, in early October, the Department of Education announced radical changes to its civil service loan forgiveness program, immediately wiping out the debt of 22,000 borrowers.

Now some social media users are saying it’s in the financial best interests of the federal government to go ahead and write off all student loan debt.

“Wait, nobody was going to tell me that American student loans cost the government more than $ 60 billion more than they make in a year ???” read the text in a Facebook post from October 25. “They could literally be canceled this second and the government would have * more * money.”

The post, shared more than 500 times in a few days, comes from a tweet from October 21 with over 4,500 retweets. Similar claims have generated thousands of interactions on Facebook, according to CrowdTangle, a social media analytics tool.

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But experts say canceling student debt wouldn’t make much money for the government. Rather the opposite.

“This idea is ridiculous”, Marc Goldwein, senior vice president and senior policy director of the Committee for a Responsible Federal Budget, told USA TODAY. “The federal government owes over $ 1.5 trillion.”

Government would lose money by canceling student loan debt

If the federal government canceled all student loans, it would lose about $ 1.8 trillion in outstanding debt. Money saved by administering federal loan programs would not make up the difference.

As evidence, the Twitter user who initially shared the complaint cited the financial section of the most recent annual report of the Federal Student Aid Office of the Ministry of Education.

According to the report, the net cost of the direct lending program in fiscal year 2019 was approximately $ 62.8 billion. For 2020, the net cost was $ 102.3 billion. Other higher education credit programs coordinated by the Ministry of Education cost $ 13 billion net and $ 3.5 billion in 2019 and 2020, respectively.

The Facebook page, Millenials for Guillotines, highlighted these numbers in defense of its article on applying for a student loan. The Twitter user who made the complaint did not respond to a request for comment.

But those numbers don’t just reflect the cost of “servicing” federal student loan programs, as the Facebook post suggests. They reflect the cost of the loans themselves, which include losses from delinquent loans, late payments, falling interest rates, or other loan forgiveness.

“In other words, the FSA expects borrowers to repay less on their loans, and the reduction in borrower payments is seen as a cost to the government.” Adam looney, a finance professor at the University of Utah, said in an email. “So not only is the fact that you are checking wrong, it is also misinterpreted. “

Looney said federal loans “are costing taxpayers a lot of money, especially in recent years.” Corn it’s because more borrowers are registered in income-driven repayment plans, have seen their payments suspended and interest rates lowered, and are expected to participate in loan cancellation programs.

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Congressional Budget Office estimates give a better idea of ​​the cost of the program, Alexandre holt, a policy analyst for the Committee for a Responsible Federal Budget, said in an email.

The agency estimates the administrative costs of the Federal Office for Student Aid will be just over $ 3 billion in 2021. Canceling all student loan debts would generate no savings other than that $ 3 billion.

So canceling all student debt would cost the federal government around $ 1.8 trillion, the estimated value outstanding loans.

“This cost of losses on the student loan portfolio held by the federal government would by definition increase a lot with full forgiveness,” Josh bivens, research director at the Liberal Institute for Economic Policy, said in an email.

Existing student debt cancellation proposals reflect this cost.

At the top of the spectrum is a plan by Senator Bernie Sanders, I-Vt., Which would write off all student debt. The Brookings Institution, a non-partisan political research group, estimated in February that the proposal would cost around $ 1.6 trillion.

A more modest plan of Sens. Elizabeth Warren, D-Mass., And Chuck Schumer, DN.Y., to write off student debt of up to $ 50,000 per borrower would cost approximately $ 1,000 billion. In the countryside, Biden debt forgiveness proposal up to $ 10,000 per person, which Brookings said would cost around $ 373 billion.

Some advocates of debt relief say so would stimulate the economy. But the money saved from administering federal loan programs alone would not make up the difference.

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“It is true that the government pays service officers to collect loan payments, but in normal times they remit much more to the government than they get paid,” Constantin Yannelis, an assistant professor of finance at the University of Chicago, said in an email. “The argument that it saves money is a bit like saying that you would save money if your car was stolen, because the person would no longer need to pay for it. gasoline. “

USA TODAY has contacted the Department of Education for comment.

Our rating: False

Based on our research, we find FALSE the claim that the federal government would have more money if it forgave student loan debt. The government owes about $ 1.8 trillion in student loans. Meanwhile, the administrative costs of the federal student aid office are estimated at just over $ 3 billion in 2021. Experts say writing off all student loan debts would not save the country money. – beyond this amount.

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