Penn Wharton says Biden student loan plan could exceed $1 trillion

Researchers found that students may be incentivized to borrow more money because the Biden administration is capping loan repayments at 5% of borrowers' income

Updated: August 28, 2022 - 3:51pm

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The Biden administration's student loan debt cancellation plan may cost more than $1 trillion, according to an analysis from the University of Pennsylvania's Penn Wharton Budget Model.

President Joe Biden last week announced his plan to forgive up to $20,000 in student loans for Americans who received Pell Grants and up to $10,000 in loans for those who did not receive Pell Grants if they make less than $125,000 or $250,000 as a family.

The largest potential cost-driver Penn Wharton identified is the Biden administration's new income-driven repayment plan, which includes capping monthly student loan payments at 5% of a borrower's discretionary income and reforming the repayment guidelines to guarantee that no borrower who makes "about the annual equivalent of a $15 minimum wage" will have to make monthly loan payments.

Debt cancellation alone will cost the United States up to $519 billion, Wharton found in an analysis published Friday. Loan forbearance, which allows borrowers to temporarily stop paying, will cost an estimated $16 billion. The income-driven repayment plan will initially cost $70 billion, however, specific details have yet to be released and the price may be significantly higher.

The income-based portion of Biden's plan needs further analysis, but it may cost $450 billion or more, bringing the total cost of student loan forgiveness to more than $1 trillion, economist Junlei Chen wrote in the Budget Model. 

One possible problem researchers found with the income-driven repayment plan is that students may be incentivized to borrow more money because the Biden administration's plan caps loan repayments at 5% of the borrowers' income.

The report comes as the U.S. national debt is already more than $30.8 trillion, according to the Treasury.