Econ 101: Biden’s Election Year Student Loan Forgiveness

Dumb and dumber looks even dumber when you dig into the details
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We’ll skip over the moral and legal points that have been widely reported (and summarily dismissed by Team Biden) … and go straight to the economics.

First, the macro look, as reported by left-leaning Wharton economists:

President Biden’s election-year plan to cancel student loan debt would cost the Treasury at least $329 billion and would mostly benefit wealthier taxpayers, according to a study released Tuesday.

The study showed that a majority of the relief would go to borrowers in the top 60% of earners.

Simplifying the argument, over $300 billion of student debt (held by about 40% of the U.S. population) would be transferred to the national debt which is owned by 100% of the population.

Economists call this a concentrated benefit and diffused cost.

That means that 60% of the population gets put on the hook for a debt that they didn’t sign up for.

Ouch

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Now, for the even more interesting micro look

My hunch: Many (most?) of the student loan holders probably envision that they’ll be getting another Biden-check in the mail … this one for $10,000.

Of course, that’s not the case.

Their loan balance will simply be transferred to the national debt.

So, what’s the pocketbook impact for the loan holders being bought off?

Let’s start with some defining parameters

  • The average outstanding student loan is about $40,000  Source
  • The average borrower takes 20 years to repay their student loan debt. Source
  • The most commonly used federal student loans have an interest rate close to 3% Source

OK, let’s plug those numbers into a basic P&I calculator (e.g. Excel’s PMT function).

image

The bottom line: An average student loan holder will see their monthly student loan payment go down a whopping $55 … adding about 2 bucks-a-day to their disposable income … about a Starbucks frappe every week.

My hunch: Recipients of Biden’s election year juice will be a bit disappointed …

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And, here’s something that I haven’t heard or read anywhere: What about the income tax implications?

According to the IRS:

IF you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.

So, at a 15% income tax rate (the lowest bracket), a Biden loan forgiveness recipient might be getting a $1,500 tax liability … for the 2022 tax year.

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To recap:

  • The national debt will go up over $300 billion … wiping out the claimed debt reduction in the recent climate control bill (err, I meant “Inflation Reduction Act”)
  • A average student loan owner will pocket about $2 per day from reduced loan payments.
  • Those who get loan forgiveness may be subject to higher income taxes this year!
  • Everybody who paid off their student loans (like me) … or who worked — rather than borrowing — to pay for college (e.g. my wife) … or didn’t go to college (like about 1/2 the country) are stuck shouldering Biden’s largesse.

It’s called Bidenomics.

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