September, 2022
Washington — The Congressional Budget Office has offered an estimate of the cost of President Biden's need-tested student loan cancellation plan, announced last month. Calculated on a "present value" basis looking out thirty years, the estimate is $400 billion. The White House quickly compared the smaller number to the $2 trillion tax cut enacted in the previous administration, which was targeted at corporations and those in the upper tax brackets. That may be a good perspective, but there's much more to the calculation that needs to be explored.
CBO appropriately cautioned that its estimate is "highly uncertain." Present value scoring is inherently problematic because it is only as good as its economic forecasting models. But present value scoring is required under the Credit Reform Act of 1990, so that's where CBO starts and ends its analysis, unfortunately.*
Another way to look at the question would be through old-fashioned cash-basis fund accounting, looking at what we know — or should know — about the nation's student loan portfolio and applying the Biden policy to how it impacts federal Treasury revenues and expenditures, without a lot of out-year guesswork. This approach also has the advantage of raising questions that are not addressed by CBO but are nevertheless important to get to matters of who is paying how much for what.
• According to GAO, the federal Direct Loan program was a money-maker for the Treasury between 2010 and the onset of the pandemic, in the amount of over $114 billion. This is mostly borrower-paid interest above the cost of the program and, if returned to borrowers through cancellations, is not a taxpayer cost but analogous to a rebate to borrowers for overcharges.
• Uncollectible student loan debts have already been written off in significant amounts that may or may not be a part of cost calculations. Neither CBO nor the White House has offered a clear explanation as to how these amounts are accounted for, how much has already been covered by excess program revenues, and how calculations are being made to ensure the amounts are not counted twice.
• Amounts of borrower remediations for loan servicer fraud, abuse, and misinformation are likewise not a part of current estimates, as far as I can tell. In April, the Biden administration offered waivers to many borrowers for the purpose of providing them borrower benefits to which they were entitled but improperly denied by servicers. How these remediations interact with other cancellations is unclear, as they are authorized under more than one statutory authority and should not be duplicated in estimates. Their totals could be large and not a cost to taxpayers, because the sums were added to borrowers' accounts improperly and their removal is a correction, not a cost. (A way to get at estimating potential remediations is to determine how much of the total borrower debt is principal and how much has been added by capitalized interest and negative amortization. If these numbers have been published, I'm not aware of them. CBO should try to make this determination, because distinguishing between what students borrowed for college and what has subsequently been added is fundamental to understanding student loan issues.)
• Consideration should be given to the fact that the Biden cancellation policy could reduce the number of borrower accounts by nearly half, cutting costs of administration.
• Consideration should be given to savings achieved by ending payments to FFEL loan holders when accounts are paid off. This includes SLABS.**
• Consideration should be given to how the Biden cancellations will positively affect the nation's economy. When the cost of tax cuts is considered, advocates often claim — irresponsibly — that the cuts pay for themselves. At best, the economic effects might cover a third of the revenue loss. Doubtless, however, there is some effect, so for consistency in arguments over economic effects, a responsible estimate should be applied against the cost of the Biden cancellations.
When the above factors are considered, my conclusion is that the CBO estimate is not only "highly uncertain" but likely overstates taxpayer costs significantly. In any case, I'd like to see numbers attached to the above factors so everyone could be more confident in making estimates.
In recent days, the Biden cancellations have been challenged in federal courts, which raises even more questions. It's possible a case could go to the Supreme Court, which seems eager to apply its new "major questions" doctrine to overrule executive branch actions. The Supreme Court could find that the Heroes Act justification for the cancellations is insufficient to support a major question, in part because of the amount of money involved in the cancellations, threatening Congress's constitutional power of the purse.
This is why costs estimates need to be refined and sorted out over who is paying for what. The Supreme Court does not need another decision based on factual mistakes, as was an infamous decision a few years ago.
Does the Biden administration have a Plan B, or Plan C, in case Plan A is enjoined? Would it use 20 U.S.C. §1082, rather than the Heroes Act, to support its action? Would it change the amount of the cancellations to be based on a retroactive reduction of interest, for which there is empirical justification, or retroactive elimination of capitalized interest, which is the source of so much borrower grief and is at the heart of servicer misconduct? Those actions could still be targeted, to make them need-based.
Remediating improper servicing, cutting fees and rates to fulfill program purposes, targeting Pell-eligible borrowers with cancellations, and reducing the number of costly accounts and unnecessary subsidies are essential to good program management, an explicit obligation of the Secretary under the law, not actions for an activist judiciary to impair.*** To those of us who have looked at student loans over the decades, from many different angles, the only "major question" is how the corruption-tainted loan imbroglio has been tolerated so long without relief and reform.
Critics of the Biden administration are on firmer ground when they note that nothing in the administration's student loan package addresses the need to restore borrowers' bankruptcy rights, which has bipartisan support, or to control college costs. That's where attention needs to be focused. It's not too late to add them to the package.
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* Nobel laureate Joseph Stiglitz writes: "Although the broad estimates of the total amount of canceled debt can be big—some reach hundreds of billions of dollars—these figures derive only from budgeting practices for how credit programs like student loans are recorded. The government and budget analysts calculate a number that is known as 'the present discounted value of foregone payments'...but it is a very poor guide for understanding what actually happens...."
** Student Loan Asset-Based Securities contain substantial numbers of loans with dubious ownership and balances, resulting from lender and servicer deception and misinformation. See, for example, the earlier blog post about an actual case, at https://viewfromthreecapitals.blogspot.com/2022/07/new-taxpayer-burdens-from-student-loan.html See CFPB corroboration of servicer issues as well.
*** A lawsuit brought by six state attorneys general alleges that lenders, servicers, and investors in their states will be harmed by losing profits from student loans that may be consolidated or cancelled by the Biden actions. The AGs are taking legal action to keep borrowers in debt so these parties can continue to profit indefinitely from well-documented program mismanagement and borrower misfortune. This is a weak foundation on which to build a "major question" for the Supreme Court.
