Cancelling student loans would benefit the wealthiest Americans more than any other group.
Here’s what you need to know.
According to a new working paper from the University of Chicago, cancelling student loans would disproportionately benefit wealthier Americans. The authors say that student loan forgiveness — which many believe would help student loan borrowers who are struggling financially — would be a regressive policy that would benefit the top 10% of income earners as much as the bottom 30%. The authors studied the distributional effects of student loan forgiveness in present value terms and found, among other conclusions, the following:
- High Income Earners: Cancelling student loans is regressive because high income earners — most of whom have graduate and professional degrees — generally borrow more student loans.
- Low Income Earners: Low income earners would benefit less than expected because their student loan balances greatly overstate the present value of the financial impact.
- Widespread Student Loan Forgiveness: Universal student loan forgiveness is a sub-optimal policy.
- Income-Driven Repayment: Income-driven repayment plans would be a more effective and less expensive alternative than outright student loan forgiveness. Policymakers may consider two prescriptions: automatic enrollment in income-driven repayment plans or offering greater financial benefits.
- Existing Student Loan Forgiveness: Existing income-driven repayment plans offer substantial student loan forgiveness to low income borrowers for their student loans. For example, after 20 years (undergraduate student loans) or 25 years (graduate student loans), borrowers can receive student loan forgiveness on the remaining balance of their federal student loans. While borrowers may owe income tax on the amount forgiven, they could save thousands or tens of thousands of dollars under existing income-driven repayment plans. Currently, some borrowers may pay as low as $0 per month for their student loan payment based on their income, family size and state of residence.
- Financial Impact: If Congress cancels student loans for every student loan borrower, an average individual student loan borrower in the Top 10% income bracket would receive $5,944 in student loan forgiveness (present value), while the average individual student loan borrower in the Lowest 10% income tax bracket would receive $1,070 in student loan forgiveness (present value). Households in the Top 30% of the earnings distribution receive almost 50% of all dollars forgiven through universal student loan forgiveness.
Biden: Cancel student loans immediately
“Immediate $10,000 forgiveness of student loans,” President-Elect Joe Biden said last month. “They’re having to make choices between paying their student loan and paying the rent…It should be done immediately.”
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Building on a campaign promise, Biden has called on Congress to cancel student loans immediately. Biden supports the Heroes Act, a stimulus package which House Democrats passed earlier this year. Among significant economic stimulus, the stimulus bill also would cancel $10,000 of student loans due to the Covid-19 pandemic. Importantly, the Heroes Act does not make student loan forgiveness available to every student loan borrower. Rather, only borrowers who are struggling economically would be eligible.
Some members of Congress and student loan advocates have called for Biden to cancel student loans through executive order. For example, Sen. Elizabeth Warren (D-MA) and Senate Minority Leader Chuck Schumer (D-NY) have called on Biden to cancel up to $50,000 of student loans through executive order. However, Biden has not committed to use an executive order for student loan forgiveness, and instead has called on Congress to cancel student loan debt.
Betsy DeVos: Cancelling student loans is a bad idea
U.S. Secretary of Education Betsy DeVos does not support widespread student loan debt cancellation. In a speech this week, DeVos highlighted many reasons not to cancel student loans for every student loan borrower. Principally, DeVos said it’s unfair to require two-third of Americans who didn’t go to college or who don’t have student loans to subsidize the one-third who did. DeVos also said it’s unfair to former student loan borrowers who already paid off student loans in the normal course and don’t receive compensation. Ultimately, DeVos has said she wants to balance the needs of both taxpayers and students—and student loan forgiveness is unfair to taxpayers.
Biden now supports a new bipartisan $908 billion stimulus package in Congress, even though it doesn’t include any plan to cancel student loans. Biden may support additional economic stimuli in 2021 after he is inaugurated. Currently, there are 45 million borrowers who collectively owe more than $1.6 trillion of student loan debt. Still, this accounts for only about one-third of adult Americans. About half of student loan debt is for graduate school, not college, which is typically associated with higher income. The Covid-19 pandemic has disproportionately impacted lower income Americans. As calls grow to cancel student loans, there are many in Congress and elsewhere that view universal student loan forgiveness as either unfair or untargeted. They also cite other economic priorities such as second stimulus checks, unemployment benefits and state and local aid. Therefore, if policymakers consider any student loan forgiveness, it may be limited in both size and scope against the backdrop of the greater Covid-19 pandemic and the state of the economy.
Pay Off Student Loans
There are also many reasons to cancel student loans. Supporters say it save a generation from crushing debt, help young people get married and save for retirement sooner, and help lessen social and racial disparity. Whether you support or oppose student loan forgiveness, you still need a game plan to pay off student loans now. Here are 3 ways to help pay off student loans, all of which have no fees: