The Paycheck Protection Program (PPP) was created in 2020 as part of the CARES Act to provide small businesses with loans to retain employees and cover other expenses during the COVID-19 pandemic. Under the PPP, loans may be forgiven if certain requirements are met, allowing businesses to essentially convert their loans into grants. This has raised questions around who ultimately bears the cost of PPP loan forgiveness.
What are PPP loans?
PPP loans are low-interest, potentially forgivable loans offered by the Small Business Administration (SBA) to small businesses and other eligible entities affected by the COVID-19 crisis. The key features of PPP loans include:
- Loans are offered through approved SBA lenders
- Maximum loan amount is up to 2.5 times the borrower’s average monthly payroll costs, up to $10 million
- Loans have a maturity of 2 or 5 years with a 1% interest rate
- Payments can be deferred for 6-12 months
- Loans may qualify for full or partial forgiveness if certain requirements are met
PPP loans provided a vital lifeline to millions of small business owners struggling to stay afloat during pandemic shutdowns and restrictions. Over $798 billion in PPP loans were approved before the program ended on May 31, 2021.
How does PPP loan forgiveness work?
The biggest incentive of PPP loans is the offer of forgiveness. Borrowers can apply to have their loans forgiven up to the full principal and any accrued interest.
To qualify for forgiveness, borrowers must use loan proceeds on eligible expenses during the 8-24 week covered period following loan disbursement. At least 60% must be spent on payroll costs, with remaining funds used for mortgage interest, rent, utilities, worker protection costs, uninsured property damage, and supplier costs.
Borrowers must submit a loan forgiveness application to their lender along with documentation verifying eligible expenses. The lender reviews the application and makes a recommendation to the SBA on how much forgiveness should be granted.
Partial forgiveness may be offered if the full amount is not used on qualifying costs during the covered period. Any loan balance remaining after forgiveness must be repaid by the borrower under the loan terms.
Who pays for forgiven PPP loans?
When a PPP loan is forgiven, the SBA pays the outstanding balance to the lender. This removes the repayment obligation from the small business.
But where does the SBA and federal government get the funding to cover billions in loan forgiveness? There are a few key ways forgiven PPP loans are paid for:
Appropriations from Congress
Congress authorized over $800 billion to fund the PPP through various COVID-19 relief packages. This provided the budget for the SBA to take over loans from lenders after forgiveness.
SBA Lending Funds
The SBA has certain lending funds capitalized by federal appropriations it can utilize to pay lenders for forgiven loans. This includes the Agency’s Loan Credit Program.
SBA Guaranty
For most 7(a) loans, including PPP loans, the SBA guarantees between 75-90% of the balance. When loans are forgiven, the Agency pays lenders the guaranteed portion.
Lender Fees
Lenders were paid processing fees by the SBA on PPP loans ranging from 1-5% depending on the size. This helped offset losses from forgiven balances.
Federal Reserve Lending Facilities
The Federal Reserve established lending facilities to bolster the PPP by supplying liquidity to the banking system equal to the amount of forgiven loans. This provided funding to banks and credit unions to handle loan forgiveness.
So in summary, Congress authorized billions specifically for PPP forgiveness. And the SBA and Federal Reserve have tools to shift losses from lenders and small businesses to the federal level. This ensures small businesses have their loans forgiven without taking on debt, while taxpayers ultimately foot the bill.
How much has PPP loan forgiveness cost taxpayers?
As of October 2022, over $800 billion in PPP loans had been approved by the SBA since the start of the program in 2020. Of that total, around $770 billion has been forgiven so far.
This means federal taxpayers have shouldered over $770 billion in costs related to PPP loan forgiveness to date. The American Rescue Plan Act appropriated $7.25 billion to the SBA’s Loan Credit Program to help pay for PPP loan forgiveness in 2021-2022.
To put the $770 billion figure in context:
- Forgiven PPP loans have cost more than six times the FY2021 budget for the Department of Education
- It’s more than double the Defense Department’s $728 billion budget in FY2022
- It surpasses the total budget deficits for FY2020 and FY2021 combined ($665 billion)
This makes the PPP loan forgiveness program one of the largest federal aid programs ever undertaken. The costs eclipse many federal agencies’ entire annual budgets.
Criticisms of PPP loan forgiveness
Despite helping millions of small businesses, PPP loan forgiveness has come under fire for being excessive, poorly targeted, and susceptible to fraud. Some of the main criticisms include:
Expensive
At a price tag over $770 billion and growing, loan forgiveness has been incredibly expensive for taxpayers. There are concerns this excessive spending has added billions to the federal deficit and debt.
Misuse of Funds
Lax oversight and eligibility requirements have led to alleged misuse of funds by some borrowers who received loan forgiveness. For example, wealthy companies and organizations accessing PPP loans or spending on non-payroll costs.
Fraud
Criminal schemes have exploited flaws in the PPP to steal loan funds or obtain forgiveness fraudulently. Billions in potentially fraudulent loans slipped through due to limited upfront vetting.
Windfall for Lenders
Banks reaped over $18 billion in processing fees from PPP loans while bearing minimal risk thanks to SBA guarantees and loss coverage on forgiven debt. This led to accusations of a taxpayer-funded windfall for large lenders.
Regressive
A December 2020 study found PPP tax subsidies benefited higher-income taxpayers the most. Around two-thirds of forgiveness funds went to the top 20% of earners, while the bottom 20% received only 2% of subsidies.
Oversight & Investigations
In response to criticism over PPP loan forgiveness, there has been increased oversight and investigations into potential fraud and abuse of the program:
- The SBA’s Office of Inspector General has opened hundreds of criminal investigations related to the PPP
- The House Select Subcommittee on the Coronavirus Crisis has probed waste and fraud under the PPP
- The Government Accountability Office deemed the PPP loan forgiveness program a “high risk” due to lack of controls
- The Department of Justice has prosecuted defendants for gaming the PPP forgiveness process through fraud
Despite greater scrutiny, only around 1% of forgiven PPP loans have been reviewed in detail. With over 10 million loans issued, critics argue billions in problematic forgiveness has likely gone undetected.
Outlook for future loan forgiveness
As of October 2022, the SBA is no longer accepting new PPP loan applications since the program ended in 2021. However, Congress could opt to introduce targeted loan forgiveness for small businesses in future stimulus bills:
- Forgiveness for specific hard-hit sectors like restaurants, gyms, or live venues
- A general forgiveness program restricted to smaller loans under $150,000
- Expanded use of 7(a) loans with broader forgiveness terms
Absent legislative action, the era of large-scale pandemic loan forgiveness programs has likely ended for now after the massive PPP initiative over the past two years.
With the economy recovered and pandemic restrictions over, lawmakers may be hesitant to approve more wide-ranging loan cancellation given the high costs to federal taxpayers. But more limited, industry-focused forgiveness could garner support as certain sectors continue struggling with COVID’s economic impacts.
Conclusion
In summary, American taxpayers have so far shouldered the more than $770 billion bill for PPP loan forgiveness to date. Through congressional funding, lending facilities, and the SBA guarantee, forgiven loans are essentially converted into grants backed by the federal government.
Despite keeping millions of small businesses afloat, PPP loan forgiveness has faced criticism for being expensive, susceptible to misuse and fraud, and regressively benefiting upper-income borrowers. Increased oversight has aimed to crack down on exploitation of the program.
Looking ahead, the era of broad loan forgiveness programs has likely ended for the time being after the PPP’s massive scope over 2020 and 2021. However, lawmakers could revive the concept for targeted aid to specific hard-hit industries that continue to feel COVID’s economic damage. With mounting concerns over the federal deficit, any future forgiveness plans will likely be restricted compared to the wide eligibility and use of the Paycheck Protection Program.
