• Ryan Lipton

Biden could forgive $200B+ in student loan debt without US losing any money


President Joe Biden could forgive at least $200 billion in student loan debt without diminishing the value of the US Department of Education's student loan portfolio, per Bloomberg.


The over $1 trillion portfolio has taken a large hit to its value over the past five years as the debt that once sold for 104 cents on the dollar is now worth just 82 cents on the dollar, via Bloomberg, as more and more former students across the country are not expected to meet their debt obligations.


The student loan portfolio now has an allowance for subsidy worth $216.4 billion.


The allowance for subsidy from the US Department of Education is "the gross amount of loans and interest receivable less an allowance for the present value of amounts not expected to be recovered (Allowance for Subsidy)."


For example, if someone gives out a loan for $100 to 100 different people, but 10 borrowers are not expected to pay back the loan the overall value of the loan portfolio would drop by about $1,000, which in the most simplistic terms is what the allowance for subsidy calculates (there are other factors as well but they are less important).


The total allowance for subsidy has increased by nearly nearly $100 billion in 2020 alone, close to 10 percent of the entire value of the loan portfolio, according to the US Department of Education, as former students become less likely to pay back the loans.

A main reason for the growing number of student loan borrowers who can't pay back their debt is the rising cost in school tuition. Over the past five years, the average balance outstanding in student loan debt has increased from $30,273 to $36,682. The number of direct loan recipients also increased from 31.5 million to 35.9 million over the same period of time.


The overall student debt burden has increased by almost $1 trillion since the financial crisis, more than the $760 billion increase in debt for mortgage loans over the same period of time, and the increase is partially on the fault of the government.

"Borrowing has risen in tandem with college costs, which have outpaced incomes for a generation, and accelerated after the 2008 crash—partly because state governments cut funding for higher education and public colleges covered the shortfall by charging their students more," said Bloomberg's Ben Holland and Alexandre Tanzi.


If the debt problem that exists today is due in part because of the government, as it cut school spending and failed to supply its own citizens with high-paying jobs, then it only seems right to cancel a sizable portion of student debt.


Democrats Chuck Schumer and Elizabeth Warren are in favor of writing down every student's debt by $50,000 whereas Biden has proposed a plan of cutting debt by $10,000 per borrower which would act as a tax cut.


"Because the large majority of the debt is owed to the U.S. Treasury, which has already issued bonds to cover it, writing off the loans won’t trigger a sudden jump in the national debt," said Bloomberg. "Instead the cost will show up in the budget each year because the government would forgo revenue from loan repayments—worth about $80 billion, or 0.4% of gross domestic product, in 2018. So essentially forgiveness would function like a tax cut."


However, there are fair arguments for not paying down the debt as it sets a precedent for people taking out loans and not having to pay them back and debt forgiveness could actually exacerbate wealth inequality in the country as a high percentage of student loan holders are from higher income families.

But, a well thought out bill that provides student loan relief to the lowest-income families would be a great stimulant for the economy in the long run and would be the right thing to do considering the government has played a role in the rising student debt burden.

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About Ryan Lipton:

Ryan is a recent graduate from the University of North Carolina at Chapel Hill and majored in Business Journalism. He has written in the past for SB Nation's Silver and Black Pride, USA Today Sports Media Group, North Carolina Business News Wire, the Daily Tar Heel, and has worked with Ice Cube's BIG3 basketball league.

For more of Ryan Lipton's articles click here.