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Biden’s dilemma: Cancel student loans or take credit for cutting deficit

Too Much Talent Band performs as Rep. Rashida Tlaib, D-Mich., third from left, attends a rally to urge President Joe Biden to cancel student debt near the White House in Washington, Wednesday, July 27, 2022. (G3 Box News Photo/Andrew Harnik) Andrew Harnik/G3 Box News

Biden’s dilemma: Cancel student loans or take credit for cutting deficit

Haisten Willis

August 23, 06:00 AM August 23, 06:00 AM

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The Biden administration would undermine a decade’s worth of national debt reduction from the Inflation Reduction Act if it decides to “cancel” student loans, according to a report from an influential nonpartisan think tank.

President Joe Biden and Democrats have bragged about the spending bill’s fiscal responsibility, noting that the bill would lower the national debt by nearly $305 billion through 2031. But almost all of those gains would be wiped out if Biden follows through with his campaign promise to shift $10,000 per borrower of student loans onto taxpayers.

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With the latest student loans pause extension set to expire on Aug. 31, Biden will have to either extend it, let it die, or announce widespread cancellation sometime over the next 10 days. Education Secretary Miguel Cardona addressed the situation on Sunday.

“From day one, we’ve been really focused on making sure we’re protecting our students and our borrowers,” Cardona told NBC’s Chuck Todd on Meet the Press. “We know Aug. 31 is a date that many people are waiting to hear something from. We’ve been talking daily about this, and I can tell you that the American people will hear within the next week or so.”

But any path other than letting the pause end as scheduled risks undercutting claims of fiscal responsibility from the White House.

An analysis from the Committee for a Responsible Federal Budget found that simply extending the student loans pause, in place since March 2020 and originally designed to help stabilize the economy during lockdowns, would cost $20 billion, negating the deficit reduction from the first six years of the act.

Should Biden cancel $10,000 per borrower for households earning less than $300,000 per year, it would cost $230 billion, enough to offset nearly 10 years of deficit reduction from the act, according to committee.

Fiscal responsibility was a big talking point for the Biden administration when it was pushing for the legislation and after the bill passed in an attempt to push back against the charge that it was another bloated spending bill being cobbled together during a period of high inflation.

“Here’s another win for the American people,” Biden said upon signing the bill into law. “In addition to cutting the deficit by $350 billion in my first year in office, and cutting it $1.7 trillion this year, we’re going to cut the deficit by another $300 billion with the Inflation Reduction Act over the next decade.”

The bill’s impact on inflation is also up for debate. An analysis from the Penn Wharton Budget Model found that the act’s effect on inflation would be “statistically indistinguishable from zero.”

Here too, canceling student loans could undermine the bill’s stated goal and even its name. The committee estimates that a one-year pause would boost inflation by up to another 0.2%, and that cancellation would add another 0.15% up front and more than that over time because money that would have gone to repaying loans would end up being spent on goods and services.

“The IRA gave Washington an opportunity to show it was finally serious about helping the Federal Reserve tackle inflation and begin to address our $24 trillion national debt,” the analysis concludes. “Broad student debt cancellation — whether by extending the pause, forgiving balances, or both — would undermine the benefits of the IRA and demonstrate a lack of seriousness in addressing our nation’s economic challenges.”

Conservatives say the White House is being hypocritical, both by insisting the economy is strong while extending the pause and by claiming to be fiscally responsible while taking actions that fuel inflation and increase the national debt.

Supporters of the pause argue that many of the 40 million borrowers are unduly burdened and that the debt is preventing them from achieving milestones such as home ownership, marriage, or having children, and that the degrees they’ve obtained haven’t come with the expected financial benefits. Many began taking on student debt while still in their teens.

While the financial impact of lockdowns was the original justification for the pause, the White House has since shifted to touting the impact on borrowers. White House chief of staff Ron Klain and both Biden press secretaries have made a point of saying no one has been required to pay a single dime of federal student loans since the president took office.

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It remains to be seen what Biden will do regarding the loans pause. Student loan servicing contractors are reportedly being told to hold off on sending out billing statements, but with just over a week to go, there has been no official word from the president.

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