The President Joe Biden administration made some effort to cancel over $400 billion worth of student loans in a program tagged student loan forgiveness plan. 

 

The plan was proposed after about three years of suspension of student loan payments by borrowers due to the COVID-19 pandemic. How will student loan forgiveness be paid for? Or, who gets to shoulder the over $400 worth of loans if borrowers aren’t paying? 

What Is Student Loan Forgiveness? 

Student loan forgiveness is an initiative where a borrower loan is cancelled or paid for by another entity. The federal student loan forgiveness was proposed by the President Joe Biden administration. The program was initiated to cancel the debt of many student loans that were suspended during the COVID-19 pandemic in 2020. 

 

But, early July this year, the Supreme Court ruled over the Joe Biden student loan forgiveness plan. Student loan borrowers are to resume payment from September while interest will start accruing on the loan from October. 

Who Will Pay For The Cancelled Student Loan?

Assuming the student loan wasn’t cancelled as proposed by the Joe Biden administration, the federal government will pay the loan. Paying for student loans that is worth over $400 billion would have increased the federal deficit. 

 

In simple terms, deficit at the federal level measures how much a country makes minus its expenditures.  In fiscal year 2021, the United States had a deficit of $2.8 trillion. This was due to the pandemic emergency relief spending. 

 

Generally, when a country is unable to pay her debt, it may cause financial panic, especially in the financial system. The 2021 federal deficit is equivalent to 13% of the US gross domestic product (GDP). This is the 2nd largest federal deficit since the end of World War 2.

What Happens When Student Loan Forgiveness Plan Is Activated?

Ideally, the US deficit for the past five decades is an average of 3% of the GDP. But, the percentage shot up to 13% in 2021 due to the Covid-19 emergency spending. An upward increase in deficit puts a country at risk of default – where she is unable to pay her debt. 

 

 According to the analyst, the federal government has two options to reduce the deficit. It is either to raise taxes or decrease spending. If either of the options is implemented, the general public will end up paying for the cancelled loan one way or another.