President Biden Announces Student Debt Forgiveness

On August 24, 2022, President Biden announced that he would forgive $10,000 in federal student debt from qualifying borrowers, and $20,000 to Pell Grant recipients. The President also extended the student loan payment pause until December 31, 2022. Watch the President’s comments.

Various news agencies are reporting different total costs. The range is between $300B-$980B over 10 years. During the President's speech, he stated that 43 million borrowers would receive debt forgiveness. 27M borrowers will receive the $20,000 forgiveness, and 16M will receive the $10,000 forgiveness. (27M x $20,000) + (16M x $10,000) = $700B. He also mentioned $6B for historically Black colleges, totaling at least $706B. If 27M people receive $20,000, the total must be at least $540 billion, so the $300 billion estimate seems wrong.

He also spoke about several programs for service workers and preschools but gave no numbers about the additional programs. He was talking about some of the more expensive parts of the American Rescue Plan not included in the rebranded Inflation Reduction Act of 2022, which passed last week.

It is unclear how the President unilaterally has the authority to spend this much money on non-emergency programs and forgive debt without Congress. The President stated that the Department of Education would have a portal for applications within 60 days. The 60 days would be up on October 30, and Election Day is November 8. USA Today reports that debt forgiveness is to get younger, indebted voters into the voting booth. It appears to be another large stimulus payment right before an election.

The President spoke about the idea that forgiveness would increase inflation or whether debt forgiveness was fair. After his remarks, a reporter asked if it was fair that people who have paid their loans or never took out loans should have to pay for other people’s loans. The President denied debt forgiveness would increase inflation. The President also spoke about the "fairness" of the program. The President responded, "Is it fair that people who don’t own $1B businesses have to pay for their tax breaks? Is that fair?” The President immediately left the room. The meaning of the President's response is open for interpretation. However, his anger and tone of the comment seem like he knows a tax burden will be placed upon the taxpayers. He said it would not. Suppose it is true that taxpayers got a raw deal. In that case, it is unclear why the President thinks the way to balance the scales is to create an even more considerable tax burden.

The President stated it would be paid for by the deficit reductions already made. He stated that last year, the deficit was cut by more than $350B. This year his administration will cut the deficit by more than $1.7T. The President touted the reduction as “the single largest reduction of the deficit in a single year in the history of America.”

Cutting the deficit is not the same as cutting the debt. The deficit is the difference between total expenditures and funding, i.e., how fast the debt grows. The debt is the aggregate deficit from every year, minus what has been paid back. In 2020, the U.S. created an incredible deficit for pandemic relief, stimulus checks, small business loans, housing, and unemployment benefits. The deficit grew by $697B, the most significant deficit growth in American history. When emergency spending stops, should it be a surprise or a laudable event that the following years would be the most significant deficit decrease?

The chart above represents data as of January 1, 2021. The chart below is the same chart with data as of June 2022. Essentially, the President's argument compares how much debt hasn't been created in 2022 to the debt created in 2020 and 2021. The lines for years 17, 18, &19 are normal-looking years. The President is saying that the 2022 debt is growing like those years, so the economy can handle more debt and a more significant deficit comparable to the emergency spending years.

Pointing out that the debt is not growing as fast does not answer how a $700B program is funded. The government will either need to borrow or tax. Some policy experts say the average taxpayer will pay $2,085.59.

The issue for the economy is not the deficit as much as the debt. The current debt is $30.73 trillion. The debt interest, not the principle, is the fourth highest U.S. expenditure. The current debt ceiling is slightly below $31.4T. The debt ceiling will need to raise again to fund the student loan forgiveness program and probably again to fund the Inflation Reduction Act.

The debt ceiling is supposed to be a hard-stop number to reel in government spending, but the government has raised the debt ceiling more than 90 times since 1959. The debt ceiling has never been lowered. It doesn't seem to have any meaning other than for political theater to watch last-minute government shutdown dramas unfold to justify large spending packages two minutes to midnight.

In 1978, a student asked American economist Milton Friedman about inflation. He famously said, "Only Washington can create inflation because only Washington can create money. Attribution to any other group is wrong…what produces it is too much government spending and too much creation of money.”

Avoid gold if you believe the dollar will be stronger on the other side of this. If that somehow happens, the price will go down. However, if you think this additional government spending will spike inflation even more, then the smartest thing you can do is protect your purchasing power now. Protecting purchasing power is what gold does best. Do it before it is too late.

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