Though President Biden has continued to argue Congress’s passage of the inaccurately-named Inflation Reduction Act (IRA) (or as I prefer to call it, the Inflation Retention Act) addresses the deficit and inflation in one fell swoop, his recent unilateral decision to cancel up to $20,000 of student loan debt per taxpayer has put the lie to claims of effective action against the mounting national debt. A recent analysis by the National Taxpayers Union Foundation (NTUF) finds that this will cost taxpayers around $400 billion.
Not even taking into consideration the numerous gimmicks that make up a large portion of the “deficit reduction” in the IRA, the bill would reduce deficits by less than $300 billion over the course of a decade. While that sounds like a lot of money, it barely makes a dent in the nearly $16 trillion deficit over the next decade — not to even mention the existing national debt of over $30 trillion that taxpayers are already saddled with.
But if a $300 billion deficit reduction package rife with gimmicks and budget tricks is insulting enough to taxpayers, it is made even more so by the student debt cancellation that more than wipes out what meager deficit progress might have been made by the IRA. President Biden’s student debt cancellation likely costs taxpayers at least $100 billion more than the IRA “saved,” epitomizing the cynicism of Washington in just a single month.
That $400 billion in additional deficits comes out to about $2,500 per taxpayer. While taxpayers won’t feel that bite on this year’s tax bill, Congress will have to make up the difference through reduced spending elsewhere, higher taxes, or, most likely, increased borrowing. Assuming the latter, the federal government essentially just took out a $2,500 loan on the average taxpayer’s behalf, one that taxpayers will be paying interest on for some time.
White House National Economic Council Director recently told a whopper when trying to obfuscate this budget reality, claiming that the student debt cancellation was “paid for” by the fact that the deficit fell from $2.8 trillion last year to $1 trillion this year. Not only does this claim represent a fundamental misunderstanding of what deficits are, but it ignores the fact that the steep fall in the annual deficit comes entirely from an end to crisis spending during the pandemic — in other words, deficits are simply reverting back to pre-pandemic levels.
And deficit impacts aside, the President’s debt cancellation is lacking on the merits. While the White House has claimed that the policy is progressive because it’s limited to borrowers making under $125,000 in annual income, that fails to take into account that many borrowers go on to make high incomes later in life thanks to their degrees.
For instance, a study by the Brookings Institution finds that the top 20 percent of earners by lifetime wealth have roughly five times the student debt of the bottom 20 percent of earners. This holds true down the wealth ladder — the second-highest quintile holds three times the student debt of the bottom quintile, and the third-highest quintile holds twice the student debt of the bottom quintile.
For cancellation of $10,000 in debt per taxpayer, nearly 60 percent of the benefit goes to the top 40 percent of income earners, while the bottom 40 percent of earners receives closer to 15 percent of the benefit. In other words, future lawyers and doctors receive a nice benefit while every taxpayer, rich and poor, is on the hook for the government’s new debt.
Meanwhile, inflation is well known to be regressive, hitting low-income earners harder than wealthier taxpayers. But Biden’s student debt forgiveness can only make it worse. Any serious effort to address inflation would include meaningful government spending cuts as well as reductions to harmful tariffs and other protectionist supply chain barriers.
Instead, taxpayers are on the hook for yet more government spending. If Congress can’t pass a putative deficit reduction bill without immediately spending more money within the same month, taxpayers can be forgiven for having little hope that Congress will seriously address the ever-growing national debt.