How does forgiving student debt cost taxpayers money?
In: 9
The government loaned the money.
Who do you think funds the government?
If you loan me 100 bucks, and are expecting me to pay you back 10 bucks a month, but then I stop paying you back (or your forgive the debt loan), you lose what I didn’t pay you back. Your money went out, and never came back in.
Taxpayers fund the government. Taxpayers loan money to students who then pay it back. If they don’t pay it back, that tax payer money is lost.
Your question is framed poorly and I’m tired of people repeating this without understanding why a government would want to consider this. The economic activity generated from people who suddenly have less loans and spend more money makes up for a lot of that forgiveness via sales tax to the government. It’s an abstract concept but when people have less debt, they tend to spend more. Biden’s administration ran the numbers and is now betting that the economic activity and “stimulus” breaks even or gets close to it at least when forgiving debt since it’s their money owed to them anyway. They’re just getting paid back a different way. This is also not a new idea by Biden – economists have been proposing this idea for years and years. What would happen if tens of millions of people who had a lot of debt and wasn’t spending and contributing much to the economy, magically had their debt erased and started spending? What would happen to the economy then? People with less debt also tend to buy homes quicker = more economic activity due to wealth accumulation from gen y and gen z, which benefits everyone not just the recent college grads. This is macro economics and plenty of research has been done on the effects of collective debt on a country’s economy.
Plus the democrats get more support from the younger voting base that had a terrible turn out at the election. So net zero from forgiving loans + sales tax, and then net positive from stronger support from younger voters. Overall, a net positive outcome for Biden without being the Armageddon on taxpayers that Marjorie Green Taylor is screaming about.
A big chunk of the loans made before 2010 are Federally backed loans, not Federally owned loans. That means someone else loaned the money and the Federal Government just promised to assume ownership of the loan if the borrower couldn’t pay. The Federal Government can’t just magic those loans away – the only way they can go away is if the government buys out the remaining balance on the loan.
For loans that are actually Federally owned, you’re basically getting into accounting weirdness. On a very simple level, the income from the loans is built into revenue projections for the Federal budget going out for the duration of the loan.
So imagine that next year the Federal deficit was projected to be $100 and student loan payments were generating $20 in revenue each year. Now that those loans are forgiven, the deficit will rise to $120 (the original $100, plus the $20 in income that is no longer coming in). That $20 has to be made up somehow. Either everyone pays for it through taxes, the government borrows more money and future generations pay for it with the taxes they pay to service that new debt, or $20 in programs get cut.
The thing that you have to keep in mind is that a cost isn’t just what you pay to get something – it can also come from a loss of income that you incur. IE, the way that you normally encounter financial costs in real life is by going out and buying something – for example, buying a $10 lunch.
But lets say I walk into your work right as your boss hands you your paycheck in the form of a burlap sack with a dollar sign on it. If I reach into that sack, pull out $10, and set it on fire, I’ve just cost you $10. If you were planning on spending the burned $10 on lunch tomorrow, then I just cost you that lunch. If you were planning on saving it, then I just cost you $10 in savings. The fact that the money disappeared before it got into your hands doesn’t matter – by depriving you of future income I have deprived you of the things that you would have bought with that income.
So as to your specific question – assuming that the Federal Government doesn’t reduce expenditures, then it costs taxpayers money because its transferring costs that would have been paid solely by student loan borrowers to taxpayers in general. If the Federal Government does reduce expenditures, then the costs are “paid” for by the people who were previously being paid by the cancelled expenditures. But at the end of the day, student loan payments were a cost to borrowers that was going into the Federal budget to pay for other things. Student loan borrowers are no longer paying that cost, so someone else has to.
One argument i haven’t really seen people make is that by forgiving the student debt, they are screwing the next guy.
That money was supposed to get paid back, to be loaned out again to the next student. That is part of why we did student loans and not just huge grants in the first place, so that the same money could be used over and over to send students to school without having to levy additional tax.
It doesn’t. An educated population has a higher tax base. Educating your people is an investment that pays for itself
They should put more stipulations on student loans. Some majors just don’t have the money making ability or social need as others. Same if someone wants a business loan.
This can set bad precedent for people not to be held accountable for their actions, like going into debt for a piece of paper.
Boomers had ruined it by making it seem like the only way to get forward in life is to have this piece of paper and push their kids into schools. The colleges are no help since they get pretty much guaranteed money from Uncle Sugar while the students are saddled with crushing debt.
The feds need to stop giving out loans willy nilly to everyone and actually look into what people are trying to get their education in.
And yes I have one of those silly pieces of paper, luckily had some scholarships, worked in school, and took very little out in loans so I could pay them off
people pay back loans —> government gets revenue
loans are not paid back —> government does not
I want to thank everyone who contributed to the conversation. I have read so many articles that state forgiving student debt costs taxpayers money, but had not seen an explanation of why that is so.
For those of you irritated with the way the question was asked or asking snarky rhetorical questions, may I remind you what sub reddit you are in.
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