Who Cares About Loan Relief? Student Loan Borrowers Just Refuse To Pay.

Few Americans realize how large the government-guaranteed student loan debt burden actually is and who pays the bill when the loans are forgiven.

The total amount of debt is about $1.6 trillion. That’s larger than the baseline budget deficit of the U.S. government for an entire year. It’s almost 6% of total gross domestic product. It’s almost 9% of the total deposits in the U.S. banking system.

By every measure, it’s a huge number and one almost totally overlooked by Americans. One of the reasons the student debt burden is overlooked is that it’s off budget. The U.S. does not actually make all the loans. The loans are made by banks and specialized lenders and then guaranteed by the U.S. Treasury. The U.S. is ultimately on the hook for repayment of the loans, but no costs are recorded in the U.S. budget deficit numbers unless the loans default (and the U.S. has to honor the guarantee) or the loans are forgiven (in which case the U.S. has to pay the original lenders).

Most loans are made to younger voters who are college-age, although interestingly many loans to younger borrowers are co-signed by parents or grandparents so the repayment obligation can easily be passed to an older generation if the students don’t pay. This brings us to Biden’s master plan.

He originally offered pandemic relief in the form of a “grace period” on loan repayments. This lasted for three years (even though the worst of the pandemic was over in one year and the economy recovered fairly quickly). The grace period got many borrowers into the habit of non-payment. That might have been fine if borrowers had saved money for the day repayment would begin, but the evidence is that the young borrowers went on vacations or ate at nice restaurants without much thought to saving.

Finally, Joe Biden announced he was forgiving almost all student loans. This was litigated to the Supreme Court, which decided that Biden did not have the authority and that an act of Congress was needed. Instead of respecting the court’s decision, Biden set out on a sneak attack by forgiving loans in specialized slices based on the status of the borrower or the educational institutions.

While all of this was going on, the “unforgiven” borrowers just decided not to pay on the theory that eventually their forgiveness would come. As reported in this article, only 40% of unforgiven borrowers have paid on time, 35% have made only partial payments, and 20% have made no payments at all.

What’s lost in the shuffle is an accounting of who actually wins and loses in this shell game. The winners are those whose loans are forgiven, plus Biden who picks up some votes. The losers are you and me.

When the loans are forgiven, the expense shifts to the budget and increases the deficit, which is ultimately paid in the form of higher taxes, higher interest rates, higher inflation, or all three. Enjoy.

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