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PROOF POINTS: Is forgiving college debt the best way to solve the student loan crisis?

student loan forgiveness

The nation’s student debt crisis is back on the agenda in Washington. Monthly payments on $1.6 trillion federal student loans have been suspended since late March, but that coronavirus break is scheduled to expire at the end of January.  The question now is whether 43 million borrowers will have to resume monthly payments in February or if Washington will act on bolder proposals not simply to postpone but to cancel student debt altogether.

Two top Senate Democrats have called for wiping away $50,000 of college debt for each borrower. House Democrats voted to cancel $10,000 in student debt in their May coronavirus relief plan, and retained the notion of debt forgiveness in their revised October bill. Progressives are urging President-elect Joe Biden to use his executive powers to cancel student debt during his first 100 days in office. Biden has signaled his support for the idea of student loan forgiveness.

Yet many economists, even left-leaning ones, are warning against addressing the student loan crisis this way. That’s because a plan to cancel the same amount of debt for all is likely to benefit many more middle and upper-middle class Americans, who can mostly pay their bills, than low-income Americans, who tend to struggle with student debt. 

Sandy Baum, an economist at the Urban Institute who studies student loan data, questions why progressives are advocating to give away so much relief to “doctors and lawyers” and relatively little to low-income borrowers “who don’t have much college education and may be unemployed.”

“It’s not a progressive policy,” Baum said.

The federal government has a central role to play in student loans because it directly lends money to students to finance college. Of the $1.7 trillion in student loans outstanding, more than 90 percent or $1.6 trillion is owed to the federal government. Only a relatively small slice, about $130 billion, was issued by private banks. 

At first glance, $10,000 of student loan forgiveness would seem to be welcome relief for many low-income Americans. The bottom 20 percent of American households make less than $25,000 a year and $10,000 of loan forgiveness would be substantial. Low-income Americans tend to be among the third of borrowers who owe less than $10,000 in federal student loans, according to Baum. This plan could wipe their slates clean and help them start fresh.

However, forgiving $10,000 in student loans for borrowers in the bottom 20 percent of the income distribution would add up to $55 billion, according to a recent analysis of 2016 data by economist Matt Chingos at the Urban Institute. There were the same number of people making between $65,000 and $110,000 but these borrowers would reap almost twice as much or $100 billion in debt relief.

Why do better off Americans collectively get more when it’s the same $10,000 in debt forgiveness per person? Higher-income Americans are more likely to go to college and have a reason to take out student loans in the first place. Many of them attend more elite four-year institutions that are more expensive. They’re also more likely to graduate, which means four years of college bills. Some choose to borrow not only to pay tuition but also for living expenses, which can include luxury dormitories or off-campus housing. And finally, many people in this upper-middle income bracket subsequently go onto graduate school. Even for people who didn’t need help to pay for their undergraduate degrees, graduate school often prompts them to borrow for the first time. 

Lower-income people are less likely to attend college and therefore are less likely to have student loans.  Among those who do go to college, many opt for less expensive two-year community colleges, much of which is paid through government grants for low-income students. Many drop out after a semester or a year and so they don’t have as many years of college to pay for.  

While many upper-income borrowers take out large loans, far surpassing $10,000, low-income borrowers tend to have smaller loans. Debts of $2,000 or $5,000 are more common, Baum explained. Even for low-income Americans with loans, few would get to take advantage of the full $10,000 in relief.  

Economists also don’t see evidence that higher income Americans are struggling to make their student loan payments and need the relief. Sixty percent of $1.6 trillion in federal student loan debt is owed by households in the top 40 percent of the income distribution, those making over $74,000. These well-to-do borrowers make almost three-quarters of all the monthly student payments, according to an October 2020 analysis published by the Brookings Institution. 

“What is surprising is that people who have more debt tend to be the best off borrowers,” said Adam Looney, a former Obama administration economist, now at the University of Utah. Looney conducted this Brookings analysis of 2019 Federal Reserve data with the Urban Institute’s Baum.

Graduate school is a big factor.  Households with graduate degrees owed 56 percent of the outstanding federal education debt, an increase from 49 percent in 2016, according to the same Brookings report. To put this in context, only 14 percent of U.S. adults hold graduate degrees. Yet they carry the majority of student debt. Their incomes are high. These households have median earnings of $106,000. Their unemployment rate is low, only 2.2 percent. 

“Forty percent of federal loans are going to graduate students,” said Baum. “That’s not who people are really thinking about. But they should.” 

The economists I talked with are concerned about low-income Americans who are unlikely to make enough income to pay down their student loans. Eight percent of student debt is held by people who dropped out of college and don’t have a degree. Another 7 percent is held by households where the highest degree is a two-year associate. The lowest-income 40 percent of households hold just under 20 percent of the outstanding debt and make only 10 percent of the payments. 

Payments are low among low-income Americans not just because some have fallen behind on their student loan bills or defaulted but also because more and more borrowers are now enrolled in plans that reduce their monthly bills. One quarter of borrowers who took out federal loans for their undergraduate education were enrolled in income-driven repayment plans in 2017, up from 11 percent in 2010, according to a 2020 report by the Congressional Budget Office

The repayment plans, which adjust monthly payments based on earnings, started slowly at the beginning of the Obama administration and were opened up to all borrowers in 2014. The unemployed or those earning below 150 percent of the poverty line pay nothing. Above that threshold, borrowers pay 10 or 15 percent of their income, not to exceed what they would otherwise have owed. For example, a middle-class borrower living alone and making $40,000 a year with $45,000 in student loans would pay $174 a month instead of $500. (These income-driven repayment plans are different from income share agreements in which students pledge a share of their future income in lieu of loans.) 

Instead of debt forgiveness for all, Baum wants more borrowers switched into income-driven repayment plans. “Nobody should have to make payments that they can’t afford,” Baum said. “It’s such a simple solution.”

Student loan forgiveness is already built into current repayment plans. After 20 to 25 years, any remaining debt is automatically cancelled. That waiting period could be shortened for more low-income borrowers, Baum suggested, as it already is for borrowers who enter into public service.

The obstacle is that borrowers have to know to apply to the federal government for these repayment plans and the paperwork can be burdensome. Borrowers can be rejected for bureaucratic technicalities. Failure to verify income every year throws many borrowers out of them. Baum says this could be fixed if the Internal Revenue Service, which already knows everyone’s income, could share that information with the student loan office at the Department of Education.

Even if the many problems with repayment plans were fixed, some people might deserve extra relief. Loans of students defrauded by for-profit institutions, for example, could be canceled entirely by the Biden administration.

Looney says that if policymakers wanted to design a progressive version of student loan forgiveness, they should focus only on undergraduate debt, not graduate student loans, and on borrowers who grew up in low-income families and those whose debts are too large compared to their incomes. 

“Before you get to a student debt relief program, you have to realize that each day there are millions of students borrowing student loans to finance college and graduate school and there will be millions more next year,” said Looney.  “If we think it was a bad idea to burden previous students with debts and that they deserve relief, we need to stop doing it to today’s and tomorrow’s students. Any relief should be paired with changes to federal lending to stop these problems from continuing to happen.”

One proposal that could reduce future student debt is to make public college tuition free. That’s something that Biden has endorsed for families making less than $125,000. A thorny issue is what to do about borrowing for living expenses, such as rent and food. Those expenses, depending upon individual circumstances and choices, can often be much larger than tuition, fees and books.

As a journalist, I find it curious that progressives who think of themselves as champions of the poor are pushing for a student loan forgiveness plan that some economists say is regressive.

Education policy professor Nick Hillman at the University of Wisconsin-Madison says student loan forgiveness is an issue where the empirical evidence may be at odds with the politics. “It’s become a progressive litmus test,” said Hillman. “How much you agree that we should cancel all student debt tells how progressive you are.”

“There’s a moral or justice argument saying, ‘We’ve screwed up. The system doesn’t work. We’ve really burdened a lot of people. So let’s just cut the knot and start fresh.’ Cancellation makes sense from that perspective,” said Hillman.

Hillman says that student loan forgiveness has become especially popular now because progressives see this as something the Biden administration could do quickly without Congressional approval.

“I feel it’s been so rushed,” said Hillman. “There’s not ever been a task force on student debt, to really study and deliberate and weigh the whole range of ideas. I may be a naive academic, but that seems like a very promising way to go about policy making. I do worry that whatever solution gets done might have unintended consequences.”

This story about student loan forgiveness was written by Jill Barshay and produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.

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