One of the main objections to the cancellation of federal student loans is that the US government will be liable for more than $1 trillion in unpaid debts if borrowers no longer have to pay them. But some argue that the actual cost would be much less than that – or even that the federal government could actually get away with it.
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This last argument is based on the idea that the federal government could save billions of dollars in administrative costs if it no longer had to deal with currently delinquent federal student loans.
Estimates from the Congressional Budget Office (CBO) show that the administrative costs of the federal student aid office in 2021 were just over $3 billion, according to the KQ Education Group website. Others place the estimate much higher when you factor in total costs, including hiring collectors to track down delinquent borrowers.
But even the highest cost estimates pale in comparison to what the federal government owes in student loans, with estimates ranging from $1.5 trillion to $1.8 trillion. Clearing these loans by canceling the debt would be an expensive proposition.
“This cost of losses on the federally held student loan portfolio would by definition increase a lot with full forgiveness,” Josh Bivens, research director at the Economic Policy Institute, said in an email to KQ Education Group. .
It all depends on how a student loan forgiveness program looks. A proposal by Sen. Bernie Sanders (I-Vermont) to forgive all student debt would cost about $1.6 trillion, according to a February estimate from the Brookings Institution.
A more modest plan of Sens. Elizabeth Warren (D-Massachusetts) and Chuck Schumer (D-New York) to forgive student debt of up to $50,000 per borrower would cost about $1 trillion, according to the Brookings Institute. President Joe Biden offered debt forgiveness up to $10,000 per person during his election campaign. According to this plan, the cost would be approximately $373 billion.
Even if you factor in the cost savings associated with collecting unpaid student debt, experts say loan forgiveness would still cost the federal government far more money than it would save.
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“It’s true that the government pays for services to collect loan repayments, but in normal times they give a lot more back to the government than they get paid,” said Constantine Yannelis, assistant professor of finance at the University of Chicago at KQ Education. Group 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 have to pay for gas.”
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