Analysis Says Biden’s New Student Debt Plan Could Cost $475 Billion

President Biden’s new repayment plan for federal student loans will cost the government $475 billion over the next decade, according to a new economic projection. The updated income-driven repayment plan would surpass the $400 billion cost of the debt forgiveness plan that the Supreme Court rejected last month.

The new repayment plan, announced last year and completed this month by the Education Department, offers borrowers a new option that caps payments for undergraduate loans at no more than 5 percent of the borrower’s income. After a borrower makes payments for either 10 or 20 years (the term depends on the size of the loan), any remaining balance would be forgiven.

The government — the largest lender to Americans who borrow to pay for college — already offers a variety of income-based repayment plans. But a new and revised plan, which the administration has named Saving on a Valuable Education, or SAVE, is vastly more generous. That means the government, not borrowers, will ultimately pay a bigger share of the recipients’ educational costs.

Economists for the University of Pennsylvania’s Penn Wharton Budget Model, a nonpartisan research group, estimate that payment reductions in the $1.6 trillion in outstanding federal student loans will cost the government $200 billion. But the biggest chunk of the program’s cost — a projected $275 billion — will come from reduced payments on the $1 trillion in new loans that the researchers expect will be made over the next decade.

A majority of current and future borrowers will opt into the new SAVE payment plan, the economists predicted. “This plan does so much,” said Kent Smetters, a professor at Wharton and the faculty director of the Penn Wharton Budget Model.

His team’s projection eclipses the $156 billion that the Education Department estimated its plan would cost over the next decade. Part of the gap, Mr. Smetters said, is that the Education Department’s estimate factored in the effects of the Biden debt forgiveness plan before the Supreme Court eliminated it. The Penn Wharton model did not.

Karine Jean-Pierre, the White House press secretary, defended the plan’s cost at a news conference on Monday after the new economic projection was released. “We can afford to give middle-class Americans, middle-class families, a little bit of breathing room,” she said.

Forty-five million student loan borrowers owe the government money, but virtually all have paused their payments through a pandemic relief measure that was started in March 2020 by the Trump administration and was repeatedly extended by the Biden administration. After more than three years, that pause is set to end, with payments scheduled to restart in October.

The Biden administration is scrambling to get as much of the new SAVE plan in place as it can before borrowers’ bills come due. But the process will be complicated, and piecemeal. The plan’s centerpiece — reducing payments on undergraduate loans to 5 percent of a borrower’s income, down from the 10 percent charged under previous income-driven plans — will not take effect until July 2024.

Conservative groups and Republican lawmakers have forcefully denounced the new plan. Representative Virginia Foxx, the North Carolina Republican who leads the House Committee on Education and the Workforce, called it “nothing more than a backdoor attempt to provide free college by executive fiat.”

But so far, no legal challenges have emerged. The plan’s foundation is the Higher Education Act of 1965, which gives the Education Department broad authority over loan repayment plans. By contrast, the debt forgiveness plan that the Supreme Court struck down relied on the HEROES Act, which gave the education secretary greater powers only in times of “national emergency” — as the government declared the coronavirus pandemic to be.

More broadly, legal groups that would like to challenge the plan are struggling to find a party with the legal standing to do so. The Pacific Legal Foundation, which backed several of the lawsuits against Mr. Biden’s student debt cancellation plan, said it would like to litigate the new plan but sees major obstacles.

“You have to demonstrate that you’re hurt by the free money or by a more generous loan forgiveness program,” said Caleb Kruckenberg, a lawyer for the foundation. “It’s not enough to say that I’m concerned about the government spending my tax dollars in this way. It’s just really a narrow universe.”

Bharat Ramamurti, the deputy director of the National Economic Council, called the Education Department’s authority to carry out the SAVE plan “crystal clear,” adding, “I would be surprised, frankly, if there was a legal challenge.”

After the Supreme Court scuttled Mr. Biden’s debt cancellation plan, the administration said it would try again for some kind of mass relief effort, this time using the Higher Education Act of 1965 — an approach that requires a long rule-making process. The Education Department formally began that process this month.

But Mr. Kruckenberg views the SAVE plan, for which the administration laid the groundwork last year, as a stealth move toward similar ends.

“I think this is sort of the administration’s Plan B,” he said. “I think they kind of started this process with the idea that if the loan cancellation didn’t work out, which it didn’t, then they can use this as a backup, and it could accomplish much of what they wanted — maybe all of it — permanently.”