Student Loan Forgiveness: How Much Would It Really Cost the Federal Government?

Document with title student loan forgiveness.
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One of the main objections to forgiving federal student loans is that the U.S. government will be on the hook for more than $1 trillion in unpaid debt if borrowers no longer have to pay it. But some argue that the actual cost would be well below that — or even that the federal government could actually come out ahead.

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The latter argument is based on the idea that the federal government could save billions of dollars in administrative costs if it no longer has to process federal student loans currently on the books.

Estimates from the Congressional Budget Office (CBO) show that the administrative costs of the Federal Student Aid office in 2021 was a little more than $3 billion, according to the KQ Education Group website. Others put 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 how much the federal government is owed in student loans, with estimates there ranging from $1.5 trillion to $1.8 trillion. Wiping out those loans through debt forgiveness would be an expensive proposition.

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“This cost of losses on the student loan portfolio held by the federal government would by definition rise a lot with full forgiveness,” Josh Bivens, director of research at the Economic Policy Institute, said in an email to KQ Education Group.

A lot depends on how a student loan forgiveness package might look. A proposal from Sen. Bernie Sanders (I-Vermont) to cancel all student debt would cost roughly $1.6 trillion, according to a February estimate from the Brookings Institution.

A more modest plan from Sens. Elizabeth Warren (D-Massachusetts) and Chuck Schumer (D-New York) to forgive student debt up to $50,000 per borrower would cost an estimated $1 trillion, the Brookings Institute found. President Joe Biden proposed forgiving debt up to $10,000 per person when he was campaigning for office. Under this plan, the cost would be around $373 billion.

Even if you factor in saving money on costs associated with collecting unpaid student debt, experts say loan forgiveness would still cost the federal government a lot more money than it would save.

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“It is true that the government pays servicers to collect the loan payments, but in normal times they remit significantly more back to the government than they are paid,” Constantine Yannelis, an assistant professor of finance at the University of Chicago, told KQ Education Group in an email. “The argument that this saves money is kind of like saying one would save money if their car is stolen, because the person would no longer need to pay for gas.”

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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