The Real Cost of Biden’s Student Loan Plan is $2.9 Trillion

Vice President Joe Biden has the most ambitious plan for student loan forgiveness in the country’s history. The Biden campaign pegs the cost of his student loan and higher education proposals at $750 billion over ten years. 

Is that estimate accurate? The answer is important because his proposals could get slimmed down if his campaign's cost estimate is too low.

Our analysis suggests the actual price tag of Biden student loan forgiveness and the Biden higher education plan would be $2.92 trillion over ten years, which is almost four times higher than what the campaign has estimated. 

These policies would significantly reduce student loan expenses for borrowers, unlike Trump’s student loan proposals, which would cost borrowers at least $249 billion over 10 years by our estimation. 

However, the Biden student loan plan components will only help borrowers if they pass. As a student loan consultant, I performed this analysis so we can help advise our readers and clients on what to plan for in 2021 and beyond. 

Given the projected costs of Biden’s student loan reforms, I expect much of Biden’s student loan plan would face an uphill battle if he wins the November election without a filibuster-proof majority.

What is Biden’s Plan for Student Loan Forgiveness and Higher Education?

We have covered the various parts of Biden’s student loan plan before, but here are the major parts:

1. Eliminate tuition at 2 and 4-year public colleges for borrowers making less than $125,000 ($1.19 trillion)
2. Reduce income-driven payments and eliminate taxes on student loan forgiveness (for old and new loans, $828 billion)
3. Expand Pell grants ($598 billion)
4. Create a yearly loan forgiveness benefit over five years for public sector workers ($178 billion)
5. Cancel $10,000 of student loan debt for lower-income borrowers ($68 billion)
6. Allow Public Service Loan Forgiveness for federal loans that do not normally qualify ($64 billion)

Let’s look at how we arrived at the potential cost of each of these programs. 

Eliminate Tuition at Public Colleges: $1.19 Trillion

Joe Biden would make two and four-year public colleges tuition-free for families earning less than $125,000, with phaseouts to avoid a cliff.

Private schools are ineligible, except for HBCUs and minority-serving institutions.

How many students could this benefit apply to? First, it’s clear this benefit would only apply to current and future students and would not forgive debt already taken out for tuition. 

How Many Students Could Qualify for Biden’s Free Public College Plan?

According to Statista, 14.53 million students studied at a public college as of 2018. About one third were enrolled in two-year colleges and two-thirds were enrolled in four-year colleges. 

The vast majority of the more than 5 million students enrolled at a private school would not. However, an exception is made for private school HBCUs and Minority Serving Institutions (MSIs). 

Overall enrollment at HBCUs stands at 292,000. Approximately half of HBCUs are public, and the other half are private. 

Hence, a rough estimate would be that about 150,000 students at private HBCU and MSI institutions would qualify in addition to the students already counted in public college enrollment numbers. 

14.53 million + 0.15 million = 14.68 million. 

Out of this 14.68 million number, how many come from families with less than $125,000 of household income?

That's important because Biden has means testing for free public college. Eligibility would likely be determined based on family household income from the FAFSA.

DQYDJ says that a family with a $125,000 household income is in the 78th percentile of the income distribution in America. Since Biden said there would be phaseouts to avoid a cliff, it’s reasonable to say free public college would apply to 80% of families. 

So 80% of 14.68 million students enrolled in public colleges or HBCUs / MSIs means around 11.74 million students could qualify for free tuition under Biden’s plan. 

It’s important to note that Biden would only cover tuition, not living expenses. 

How Much Money Would a Typical Student Save with the Biden Free College Plan?

The average tuition for a community college is $3,500 per year, while the average tuition for a four-year college is $10,000 per year, according to the College Board. 

Hence, per student savings on average would be:

• $7,000 for a student who completes a 2-year degree
• $27,000 for a student who goes to 2 years of community college then 2 years at a 4-year institution
• $40,000 for a student who completes her degree at a 4-year institution

How Many New Students Would Enroll with Free Tuition?

If tuition costs nothing, certainly, there would be some level of increased enrollment at public colleges and universities across the country. 

Past landmark legislation like the GI bill dramatically expanded the number of students.

Hence, you would have to assume that more students would sign up at free public colleges.

Any cost estimate of Biden’s higher education plan would need to account for this to be realistic. So how much larger would this increased enrollment be? 

First, there are a little over 5 million students enrolled at private colleges across the country. If public college was free, would any of them switch to public college instead? Quite likely. 

Other students who previously might not have considered college because of the high cost might reconsider if college was free. 

Furthermore, the increased number of students enrolling in public college would be doing so because of the free tuition. Hence, you’d expect they would virtually all qualify by coming from families with less than $125,000 of household income. 

A reasonable estimate might be that public college enrollment would increase by 10%, or just under 1.5 million, split one-third in two-year colleges and two-thirds in four-year colleges. 

So the pool of eligible students then would be 11.74 million (students at public colleges with qualifying family incomes) + 1.5 million (increased enrollment) = 13.24 million students. 

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Total Cost Breakdown of Biden’s Free College Plan

Here’s the math of the cost of free college annually, given one-third enroll in two-year colleges and two-thirds enroll in four-year colleges with the average tuition rates listed above. 

Free public college cost = 

0.33*(13.24 million) * $3,500 + 0.67 * (13.24 million) * $10,000 =

$104 billion (annual cost) 

The College Board estimates an approximate rate of tuition inflation at 3% for public colleges and universities. 

If you grow this $104 billion annual cost at 3% each year, then the 10-year cost of Biden’s free public college plan would be:

$1.19 trillion (10-year cost) 

One fascinating result we found from this analysis: free tuition at every HBCU and Minority Serving Institution in America would cost $2 to $3 billion annually compared to the $104 billion we projected above for a more ambitious plan. 

In light of the protests for racial justice in America, everyone can agree that closing the racial wealth gap is top of mind. One reason free public college is attractive is as a means to this goal.

This analysis suggests that if free public college does not get sufficient support, a more targeted approach promoting first-generation and underrepresented minority students would not cost as much as one might think. 

Free public college appears to be the most expensive part of Biden's higher education plan. However, the remaining parts combined are even more expensive collectively.

Reduce Income-Driven Payments and Eliminate Taxes on Forgiveness: $828 Billion

Joe Biden wants to reduce income-driven repayment (IDR) amounts drastically.

Right now, a borrower must pay 10% of her discretionary income on her student loans under the PAYE or REPAYE plans. It’s 15% on the IBR plan. 

Biden’s income-driven plan would only require that she pay 5% of her income towards her student loans. 

That’s a 50% reduction in monthly payments for most borrowers, which would be amazing if you owe a lot in student debt.  

Additionally, Biden wants to eliminate taxes on student loan forgiveness. It’s very difficult to project the cost of this because no government body has ever estimated how much revenue would come in from taxes on forgiven student loans. 

In February 2020, the nonpartisan Congressional Budget Office released an analysis of the projected cost of Income-Driven Repayment plans over the 2020s. When I mention stats from the CBO in this section, assume it came from that report. 

My analysis of the cost of Biden’s student loan IDR plan will look at several factors:

• Expected volume in billions of student loans over the next 10 years
• Subsidy the government will pay towards loans on an IDR plan
• How many borrowers will switch to an IDR plan with a lower payment required
• How schools (especially graduate programs) would increase prices
• How students would select more expensive programs with lower payments not connected to the amount borrowed

Given the uncertainty of these inputs, this section has the greatest cost variance of Biden’s student loan proposals. 

First, let’s look at an example to see how drastically some borrowers would benefit under Biden’s student loan plan.

Example of Biden Student Loan Forgiveness

Assume Dennis is a lawyer at a small family law firm in the DC suburbs. He owes $200,000 of student debt from attending law school in the DC area, and he earns $80,000 per year. 

He plans to pursue the Pay As You Earn plan (PAYE), which allows him to pay 10% of his discretionary income for 20 years. At that point, his debt is forgiven. 

However, he must pay income taxes on the forgiven balance. 

The Biden plan would allow him to pay 5% of income for 20 years with no taxes on the forgiven balance. 

Assuming a 40% tax rate and a 6% student loan interest rate, here’s how the cost of the two plans would compare. 

The best way to compare these two plans is to look at the present value, which is the cost in today’s dollars of a loan program. 

Using a 5% discount rate, the PAYE plan costs $144,214 while the Biden plan costs $51,349. 

Initially, the subsidy rate would be 28% under PAYE. 

With the Biden plan, the subsidy rate would be about 75%. 

The cost to Dennis the lawyer of paying his student loans would plummet under the Biden plan, which would benefit graduate degree professionals like him most of all. 

How Much Student Debt Will Be Issued in the Next 10 Years?

To know how much student debt Biden would forgive under his plan, you need a starting point for how much debt will be issued over the next ten years. 

Luckily, the CBO made this projection already in the report I mentioned earlier. 

The total volume the CBO expects is $1.054 trillion in the next ten years. 

How Many Borrowers Would Adopt More Generous IDR Plans?

According to the CBO, between 2010 and 2017, as income-driven plans became available to more borrowers and their terms became more favorable (from 15% of income to 10% of income), more borrowers adopted IDR plans.  

The share of borrowers with loans from undergrad study in IDR plans went from 11 percent in 2010 to 24% in 2017. 

Borrowers with loans from graduate study in IDR plans went from 6 percent in 2010 to 39% in 2017. 

As of March 31, 2020, the share of direct loan borrowers in an IDR plan is now 53%, according to the Department of Education.  

Why is this important?

When you make IDR plans way more generous, a much higher share of borrowers will adopt them based on past history.

The CBO assumes more borrowers will choose fixed repayment plans instead of IDR plans in their forecast. 

In fact, you could assume with the Biden plan that as much as 80% of borrowers would adopt an IDR plan if allowed to pay 5% of their income. 

Demand Would Increase for Higher Education with More Generous Loan Programs

For an accurate estimate of student loan volume over the next ten years, you also would need to adjust for the smaller amount of debt that would be issued under Biden’s plan. That’s because public college would be free.  

Although, for grad schools you’d need to account for higher tuition prices if students could simply pay 5% of their income. 

The student debt for undergrad in a world with free public college would primarily come from living expenses.

If a lot more students attended college because of free tuition, you could even see a scenario where student debt remains unchanged if Stafford loan limits did not change. That's because students could use the money to enjoy a higher standard of living.

You also need to account for the new schools that would open due to increased student demand, especially for graduate and professional degrees. 

After all, between 2003 and 2018, the number of pharmacy schools tripled from 43 to 129 as the Grad PLUS program removed any borrowing caps on federal loans. 

The graduate schools that tend to open additional seats are often the higher cost private schools too. 

So a greater demand for education and the likelihood of tuition price increases might offset the reduced borrowing because of public college being free. 

Without a better way to estimate the impact, we’ll assume that the effects offset so we can just use the CBO estimate for volume over the next ten years. 

The only difference is we will assume 80% of this volume would use an IDR plan instead of the current rate of 53% for Direct Loan borrowers.

So the total loan volume issued on an IDR plan over the next ten years would be $843.2 billion with this estimate. 

Subsidy Rate of Loans on an IDR Plan

To measure the cost of the Biden student loan plan, you only want to account for the cost of changes he proposes, not the current state of student loans. 

The best way to measure the cost of an Income-Driven Forgiveness program is to look at expected subsidy rates. 

The subsidy rate represents how much of the loan the government is expected to pay at the time it is issued. 

You calculate subsidy rate based on a technical term called present value.

You take all the expected cash flows the borrower will pay and discount them all to the present after selecting an interest rate to discount them with.

If you borrow $100,000 but the present value of cash flows is $60,000, then the government would be providing a 40% subsidy for your borrowing.

Current Subsidy Rates

The government measures subsidies based on the rules of the Fair Credit Reform Act of 1990 (FCRA). 

This looks at the cost of government lending programs with a discount rate of Treasury bonds. 

This is not a realistic measure to represent the cost of a loan to an individual with a default risk much higher than the US government. 

The CBO also shows subsidy on student loans using the fair-value method.   

Using this method, the subsidy on student loans (not including the effects of taxes on the forgiven balance) is about 43 percent, according to the CBO.

Using the FCRA, the subsidy is only 17%. Borrowers on fixed payment plans appear to be providing a double-digit profit to the government, at -13% subsidy, even though many refinance and deprive the government of that interest revenue.

Subsidy of Eliminating Taxes on Forgiven Student Debt

One big change with IDR plans the Biden campaign proposes is to eliminate taxes on forgiven student loan debt. 

We should add that cost to the total for a reflection of the cost of Biden’s student loan plan. 

In its report, the CBO did not look closely at the cost of eliminating taxes on forgiven student debt. This cost would be measured years from now. 

It did show a hypothetical example of a borrower with $50,000 of student debt. This borrower’s subsidy rate would be reduced by 9.6% if he had to pay taxes on his forgiven student loans. 

In the absence of a better number, let’s assume that eliminating taxes on forgiven student loans would contribute 10% to the subsidy rate. 

So with taxes on forgiven balances, the subsidy rate would be 33% instead of 43%.

The extra 10% subsidy rate would be attributable to eliminating taxes on forgiveness. 

What Subsidy Would Reflect Lower Payments?

I ran a cash flow simulation that would reflect a 17% subsidy and a 43% subsidy to try and figure out what subsidy would happen when allowing borrowers to pay 5% of their income instead of 10%.

You could pick your own number by simply asking, “what would the subsidy rate be on student loans if the government cut payments in half?”

The current subsidy rate is estimated at 43%, and the number I came up with was a subsidy rate of 72% under the Biden plan. 

The subsidy change of Biden’s student loan plan would be 72% minus 43% plus 10% for eliminating the taxes on forgiveness. 

So Biden would therefore be paying 39% more of all student loan balances for borrowers who enroll in an income driven plan. 

Total Cost of More Generous IDR Plans

We assumed the total issuance of loans on an IDR plan above would be $843 billion.

With an extra 39% subsidy, the added cost of new loans over ten years would be about $329 billion.

For existing loans, we assume 80% of the $1.6 trillion would eventually end up on IDR plans. 

That increased subsidy would therefore be (0.39 added subsidy) *($1.6 trillion)*(80% expected IDR adopt rate) = $499 billion. 

The total additional cost of reducing IDR payments and making forgiveness have no tax consequences would be $329 billion + $499 billion =

$828 billion 10 year cost. 

Expanding Pell Grants: $598 Billion

In the 2017-2018 school year, the average Pell Grant in America was $4,271.

Part of Biden’s plan calls for doubling the maximum Pell Grant award. According to the Biden campaign site, 7 million students benefit from Pell Grants annually.   

If you assume the average Pell Grant would double if the award limit doubled, then the average Pell Grant would grow from $4,271 to $8,542. 

Across 7 million students, that would be $59.8 billion annually, or:

$598 billion over 10 years. 

It might be more accurate to call the Pell Grant expansion part of the Biden higher education plan versus the Biden student loan plan. 

That said, economically needy students likely would replace loans with these expanded grants, which would be similar to forgiving student loans that would have otherwise been issued.

That’s why I included it in the overall student loan plan cost estimate.  

Forgiving $10,000 a year of loans for Public Servants: $178 Billion

One big problem with the PSLF program currently is that it helps borrowers with large balances receive forgiveness more easily than borrowers with small balances. 

PSLF is a program that benefits lawyers and doctors a lot more than teachers, firefighters, and social workers.    

Perhaps that is why Biden wants to allow borrowers to receive $10,000 in loan forgiveness per year for serving in the public sector. 

For borrowers who would receive PSLF on their large remaining balance, this benefit is not an added cost since their debt would be forgiven anyway. 

However, many borrowers in the public sector would receive forgiveness under this plan than otherwise would have, which means there’s an added cost from this program. 

Estimating Costs of a 5 Year Forgiveness

We know some of this $10,000 per year forgiveness would be additive, but we have to guess to estimate a number. 

There are about 45 million student loan borrowers, with at least 25% of those employed in public or nonprofit jobs based on BLS data. 

So at least 11.25 million borrowers would have debt eligible for this $10,000 per year forgiveness benefit. 

According to the Dept of Education, not all would get the full $10,000 a year benefit since the average student debt is about $35,000. 

Also, with free public college, the average benefit of this forgiveness could be further reduced. 

Yet if Stafford loan limits did not change, borrowers would presumably just use the full amount for living expenses, which Biden does not cover in his plan. 

Without a good way to estimate how much five-year public service forgiveness would cost, let’s assume that existing borrowers with more than $60,000 of student debt but less than $100,000 get the full $50,000 benefit over five years. 

Those with less than $60,000 of student debt but at least $20,000 get $20,000 over five years on average. 

We’ll write off all the folks with small debt that might not get much of a benefit. We’ll also write off the folks with six-figure balances that would get loans forgiven via PSLF in full anyway. 

According to the Department of Education, as of March 2020, there are 3.9 million borrowers with more than $60,000 of student debt but less than $100,000 and about 13.5 million borrowers with less than $60,000 but more than $20,000 of student debt. 

Hence, the combined price tag of five-year forgiveness for existing borrowers would be:

(25% of workforce in the public sector) * [ $60,000*3.9 million + $20,000*13.5 million) ]

= $126 billion over 10 years. 

For new borrowers, assume the public college benefit reduces some of the added benefit of this five-year public servant forgiveness program. 

Without a great way to estimate this, assuming this benefit adds 5% to the projected subsidy on the $1.053 trillion of expected issuance in the next 10 years, the cost would be $52 billion over ten years for new borrowers. 

Thus the total cost of the new five-year public servant forgiveness program would be: 

$178 billion over 10 years. 

Canceling Student Debt for Economically Distressed Borrowers: $68 Billion

This part of the Biden student loan plan comes from the HEROES Act that Congressional Democrats supported earlier in 2020. 

Initially, all borrowers would have received $10,000 of cancellation. The CBO said the price tag would be in the $250 billion to $300 billion range.

This higher than anticipated price tag caused House Democrats to amend the language to say “cancellation for economically distressed borrowers.”

That would include anyone in default or delinquency and borrowers with IDR payments of $0 a month. 

The fact that Congressional Democrats scaled down a student loan proposal drastically because of the unexpectedly high cost that came out of the CBO estimate gave me the idea for this article.

If the Biden student loan plan cost estimate is wildly off, then the chances of it all happening in its current state are much diminished, which has implications for your student loan strategy.

Anyhow, many borrowers pay $0 a month in their first year following graduation. 

Also, 11% of the 45 million student loan borrowers are very delinquent or in default.   

Assume the total % of borrowers who would therefore qualify is 15%, which is likely too low even though some borrowers would not owe enough to get the full $10,000 cancellation benefit.

This would only apply to borrowers who currently have student debt. So we don't need to estimate the cost for borrowers planning to take out loans over the next 10 years.

Hence, the cost of a $10,000 cancellation for economically distressed borrowers is 15% of 45 million borrowers times $10,000 =

$68 billion over 10 years. 

Allow More Loans to Be Eligible for PSLF Program: $64 Billion

Joe Biden has supported the What You Can Do For Your Country Act, which would allow all types of loans to qualify for PSLF, not just Direct student loans. 

Specifically, this bill would allow FFEL student loans to qualify. It would allow 50% of student loans to be forgiven after five years of public service, with the remainder being forgiven five years later. 

Borrowers would also have an easier time applying with a streamlined application process.

That’s certainly a good thing for anyone who has dealt with the ridiculously complicated system that exists today. That said, it would likely also increase the cost of PSLF by making the program work as intended more efficiently. 

We’ll just look at the provision making more loans eligible for PSLF because it’s the clearest.

First, note that nonprofit workers make up about 10.3% of the workforce and public sector workers make up about 14.5%.

So about 25% of the total workforce would be eligible for having their loans forgiven under the PSLF program. 

You’d assume public servants are overrepresented in the field of student loan borrowers, meaning more than 25% of student loan borrowers could qualify.

That said, maybe some of them also owe modest balances that wouldn’t be large enough to forgive. So we’ll leave the ratio at 25%. 

There are $257 billion of FFEL loans as of 2020. These loans are from an older loan program guaranteed by the government, but not eligible for the PSLF program.  

Most of the borrowers with FFEL loans have already made ten years of payments. Thus, most of them could qualify to have their loans forgiven in full if their employment qualified. 

Therefore, the cost of PSLF forgiveness for FFEL loans could be about 0.25 * $257 billion =

$64 billion 10 year cost. 

Other Possible Costs with Biden Student Loan Reform

Other costs of Biden’s student loan plan include allowing bankruptcy for student loan borrowers, making discharge easier for students who attended fraudulent colleges, and possibly lowering student loan interest rates.

Allowing Student Loan Bankruptcy Protection

Allowing bankruptcy for student loans would likely be an expense borne mostly by private investors. It might be an added cost for the government in the case of older government-guaranteed loans. 

Estimating the direct cost of this provision would be difficult, so I left it out of the formal analysis.

A pure guess might be tens of billions over a ten-year period. Certainly, this provision would be cheaper than other parts of Biden’s plan such as free public college and lower IDR payments. 

Allowing Forgiveness for Students Who Attended Predatory Schools

Secretary DeVos has made it very difficult for students who attended predatory for profit colleges to get their loans forgiven.

This “borrower defense to repayment” rule if properly applied would result in large scale forgiveness for students whose institutions lied and deceived them to entice them to enroll.

The speed of discharges has slowed under the Trump administration to a snail's pace. However, under a Biden administration these discharges would happen a lot faster. That would likely also increase the cost of Biden student loan policies.

Lowering Interest Rates on Federal Student Loans

Also, lowering interest rates on federal student loans could be part of future student loan reform. 

Biden has not focused on the high level of student loan interest rates with his student loan plan.

One plan put forward by Senator Warren would allow borrowers to reduce their interest rates in some cases by 2% or more. 

Quick math would assume a step like that could cost 2% * $1.6 trillion = $32 billion, or $320 billion over ten years. 

We can't include this in the Biden student loan plan cost because Biden has not explicitly supported lowering student loan interest rates in the 2020 campaign.

I mention it because there's a strong chance he would support this if progressives pushed for it based on his pivot in supporting free public college in April 2020.

We leave these and other potential costs out of the analysis. However, they could easily push the projected cost above the $3 trillion mark if included.  

Total Cost Summary of Biden Student Loan Forgiveness

The total cost of Biden student loan forgiveness calculated above sums to $2.926 trillion. 

This includes the cost of:

• Free public college ($1.19 trillion)
• Lower IDR payments ($828 billion)
• Expanded Pell Grants ($598 billion) 
• Cancellation for public servants ($178 billion)
• Cancellation for low-income students ($68 billion)
• Expanded PSLF ($64 billion)

All of these policy goals are noble and would help a lot of borrowers. There would be an enormous benefit. However, there is also a high cost. 

Economists and policy experts can debate whether the benefit to GDP would be larger than the cost of these loan reforms. That's a valid discussion to have.  

In contrast to the Biden student loan plan, Senator Sanders proposed a $2.2 trillion student loan plan with projected revenue of $2.4 trillion from a Wall Street speculation tax. Biden says he would pay for his student loan plan with a repeal of the excess business losses tax cut.

Sen. Warren proposed increasing the income-driven payments of high-income earners by reducing their deduction before 10% of their pay is taken. She also proposed a large scale student loan forgiveness plan. 

President Trump proposed having borrowers pay 12.5% for 15 and 30 years for grad students, but has not pushed to make student loans a legislative priority. Intentionally or not, he has instead deferred to the status quo of the policies set in place under the Obama administration.   

It’s clear the Biden campaign’s estimate of $750 billion for his student loan plan is not accurate.  

From what we've seen with prior student loan proposals from Congressional Democrats, this suggests Biden's student loan plan is unlikely to pass in its current form without significant revisions.

The original $750 billion cost could be attained by limiting the Pell grant expansion, capping the amount of free public college tuition the government would pay for, and maintaining the current income driven plans at 10% of income. Alternatively, you could also eliminate only specific parts of Biden's plan if the goal is to have the 10 year cost come in at $750 billion.

What do you think of Biden's student loan plan? What chance do you think it has of becoming law? Comment below!