Each month, Brandon Blackwell, a 29-year-old occupational therapist living in Maryland, pays down $1,000 on the nearly $300,000 he owes in federal and private student loans. Though he expects to break the six-figure mark this year, his high debt-to-income ratio has made it hard to get a credit card, and impossible to save for retirement. And he hasn’t even started paying down the principal yet.
So Blackwell, along with millions of other struggling borrowers, will be watching President-elect Joseph R. Biden Jr. closely in his first days in office, hopeful that he will respond to growing calls from congressional Democrats and party progressives to quickly cancel some or all of the outstanding $1.5 trillion in student-loan debt.
The idea that the government could wipe out billions in student loans with the stroke of a pen was once considered fringe, a leftist dream with roots in the Occupy Wall Street protests of 2010. But as the nation’s debt burden has grown and efforts to ease repayment have disappointed, the idea has gone mainstream, with more than half of Americans in a 2019 poll saying they’d support eliminating all existing student debt. More than 230 organizations, many of which backed the Biden campaign, have signed onto a letter urging Biden to cancel student debt on Day 1 of his presidency. (Trump-administration lawyers in the Education Department argued in a memo earlier this week that the move would require an act of Congress, The Wall Street Journal reported.)
Proponents of widespread student-loan forgiveness argue that it will stimulate the economy and reduce the racial wealth gap. But opponents argue that it would do neither thing well, and could deepen resentments among those without college degrees toward the so-called “educated elite.”
During the presidential campaign, Biden backed legislation that would forgive up to $10,000 in undergraduate or graduate student debt for every year of national or community service, up to five years. More recently, he pledged to extend a period of loan forbearance that began last March, and said he would support Congress immediately canceling $10,000 in federal student-loan debt per person.
So far, though, the president-elect doesn’t seem to be bending to the pressure from within his own party to cancel $50,000 in student loans unilaterally. In a recent conversation with newspaper columnists, he said he would be “unlikely to do that.”
“I’ve spent most of my career arguing against the imperial presidency,” Biden reportedly said.
But is debt relief on a broad scale even a good policy, from an economic and racial-justice perspective? Here are four questions to consider:
Would It Stimulate the Economy?
Broadly speaking, stimulus measures aim to increase spending when the economy is in a slump. By reducing taxes, lowering interest rates, canceling debt, or cutting checks, Congress and the Federal Reserve try to put — or keep — more money in the pockets of consumers and businesses.
But canceling $50,000 in student debt isn’t the same as handing a borrower a check for $50,000. For a borrower in standard repayment with an average debt burden, it’s more like giving them $200 to 300 a month — a typical monthly loan payment. Borrowers in income-based repayment plans, who often pay little or nothing on their loans, would get an even smaller boost.
That makes loan forgiveness a weak form of stimulus, especially compared with unemployment benefits and universal checks, according to the nonprofit Committee for a Responsible Federal Budget. It estimates that eliminating all $1.5 trillion in student debt would free up only $90 billion in cash in 2021.
Even that figure could be an overestimate. As Jason Furman, former chair of President Barack Obama’s Council of Economic Advisers, pointed out in a tweet, the taxes owed on the forgiven debt could cancel out the short-term savings, reducing the stimulative effect of debt relief to next to nothing.
Whatever cash loan forgiveness does provide would be poorly targeted as a stimulus. That’s because a small share of the savings would go to low-income households, who research shows are the most likely to spend additional dollars when they get them. Only one-tenth of loan payments come from households in the bottom-two income quintiles; the top-two quintiles — those making more than $74,000 — account for nearly three-quarters of repayments, according to a recent analysis by the Brookings Institution. Those households are more likely to save or invest additional dollars than spend them.
Capping forgiveness at a certain dollar amount, or including income cutoffs, as Sen. Elizabeth Warren (D-Mass.) proposed, would help target debt relief, and lower its costs. But it wouldn’t distribute any more money to the lowest-income borrowers, and it would still leave out some of the lowest-income individuals in the U.S.: those who never attended college and therefore have no student-loan debt.
“If we are being honest about things, student-debt forgiveness is possibly the least effective stimulus imaginable on a dollar-for-dollar basis,” the president of the progressive People’s Policy Project wrote in a recent article.
But if loan cancellation wouldn’t transform the economy, it would improve the lives of millions of Americans, freeing them from the financial and psychological shackles of student debt. With no monthly loan payment — or at least a reduced one — some struggling borrowers would be able keep a roof over their head and the lights on in their home. Others, like Blackwell, would finally be able to save for retirement. And with a lower debt-to-income ratio, many borrowers would find it easier, and cheaper, to borrow for a car, home, or new business.
And it’s not just young people who are struggling. There are more than 8 million people over the age of 50 with student-loan debt, and they owe more, on average, than borrowers under the age of 35, according to an analysis of federal data by Alan Collinge, the founder of Student Loan Justice, a grassroots advocacy group.
Canceling all debt would “free the minds of millions of people who are losing sleep over these loans,” Collinge said.
Would It Shrink the Racial Wealth Gap?
There’s no question that Black Americans are disproportionately burdened by student-loan debt, accounting for 15.7 percent of the population and 23.3 percent of outstanding student debt, according to an analysis of by the People’s Policy Project. Compared with their white peers, Black students are more likely to borrow, to borrow larger amounts, and to default on their debt.
Those disparities have their roots in decades of racist policies that hindered Black families from accumulating wealth and led to the underfunding of the historically Black colleges and regional publics that a majority of Black students attend. Discrimination in the labor market makes it harder for borrowers to pay down their debt and compels disproportionate numbers of Black students to enroll in graduate school, where they are almost twice as likely to accumulate additional debt as white students.
The result: 20 years after starting college, the typical Black borrower still owes 95 percent of their debt, while the typical white borrower owes just 6 percent, according to a study by the Institute on Assets and Social Policy at Brandeis University.
“It’s really looking like a racialized system,” said Raphaël Charron-Chénier, an assistant professor of justice and social inquiry at Arizona State University who co-wrote a recent study examining how forgiveness would affect different racial groups.
That report found that canceling $50,000 in debt would wipe out debt for nearly 80 percent of Black and white households, lifting more than 70 percent of those with negative net worth into positive territory. But debt relief wouldn’t put much of a dent in the yawning wealth gap, and might even cause it to grow slightly, the analysis found.
“We have to be realistic about what debt relief can do,” said Charron-Chénier. “It can have a transformative impact for borrowers, but it is not necessarily the most effective way to shrink the racial wealth gap.”
At cancellation levels up to $50,000, white households stand to gain the most in absolute dollars, the study found. Yet Black households would benefit more in relative terms because they are starting out with less. Among borrowers with low net worth, even small cancellation amounts can lead to huge increases in wealth. Canceling just $20,000 in debt would yield a tenfold increase in overall Black wealth, according to the report.
Forgiving even $10,000 would eliminate student-loan debt entirely for more than a third of borrowers of all races — 16.3 million people — and could drive down default rates significantly. But it wouldn’t do much for Blackwell, at least in the short term. Because Blackwell, who is Black, is repaying his federal-loan debt based on his income, not his balance, his monthly payment wouldn’t change.
In a not-yet-published survey of 1,300 Black borrowers conducted by the Education Trust, 80 percent of respondents said they favored full cancellation that wasn’t means tested, so better-off borrowers with large graduate-school debts would get relief, too.
Jalil Mustaffa Bishop, a University of Pennsylvania postdoctoral fellow who oversaw the survey, said there was a feeling among successful college graduates of ,“I overcame so much to get to this point, and now I’m being told I made too much, or my balance is too high” to benefit.
In follow-up interviews, survey respondents spoke of the mental strain their debt was placing on them, describing it as a “dark cloud,” or “lifetime sentence,” said Bishop.
“It’s a symbol that something can always be taken from them — that someone could garnish their wages or income-tax refunds,” he said. “There was a real fear that this debt was something they would carry with them until they pass away.”
Is It Progressive or Regressive?
Progressive policies are intended to diminish the gap between the haves and the have-nots, and typically confer a greater benefit to lower-income individuals.
Yet full debt relief would distribute $192 billion to the top 20 percent of earners, and only $29 billion to the bottom 20 percent, an analysis published by the University of Chicago found.
That’s largely because higher-earning households often include individuals who attended graduate school. In 2019, households with members holding graduate degrees owed 56 percent of the outstanding education debt; those that included individuals with professional or doctoral degrees owed 20 percent, the Brookings analysis found. For context: Only 14 percent of adults over the age of 25 hold at least a master’s degree, and fewer than 4 percent hold professional or doctorate degrees.
Forgiving all student debt would “deliver a windfall” to these individuals, many of whom can afford to pay, said Sandy Baum, one of the authors of the analysis.
“If you want to think about the people who are really struggling, they are the people who didn’t go to college,” said Baum. Over 70 percent of the currently unemployed do not have a bachelor’s degree, and 43 percent did not attend college at all, according to the Committee for a Responsible Federal Budget.
So what about Warren’s proposal to cap forgiveness at $50,000 and phase out benefits for higher-income individuals? Even that more-targeted approach would be regressive, said Adam Looney, a nonresident senior fellow at the Brookings Institution.
But some proponents of abolishing all debt say the fact that some well-off individuals would benefit from the relief is beside the point.
“What about the millionaires and billionaires who got stimulus checks — is that fair? What about the businesses that didn’t need the PPP loans?” asked Collinge, of Student Loan Justice. “To slice and dice who gets forgiveness, all that does is perpetuate this unsavable lending system.”
Are There Better Ways to Ease the Burden of Student Debt?
The chief alternative offered by critics of debt relief is an expansion of income-based repayment, under which borrowers pay no more than 15 percent of their income above 150 percent of the federal poverty line each month, and have any remaining balance forgiven after 20 to 25 years. Currently, roughly a third of borrowers and half of debt are in income-driven plans.
Enrolling everyone in an income-based plan would distribute more dollars to the bottom 30 percent than forgiving $10,000 of debt would, at a third of the cost, according to the University of Chicago analysis.
“If the goal is to provide more relief to lower-income people, this provides more relief at a lower cost,” said Constantine Yannelis, one of the report’s authors.
Income-based repayment already “operates like a progressive repayment system,” Looney added.
“If you are low-income, you don’t pay, and if you’re persistently poor, you never pay,” he said. Congress could make IBR the default repayment option, automatically enrolling borrowers in the program, unless they opted out, he suggested.
But critics of that idea say the existing safety nets for borrowers — such as IBR and public-service loan forgiveness — have been mismanaged by the federal government and its servicers and have failed to deliver the promised relief. They point out that fewer than 3 percent of the borrowers who have sought to have their loans discharged under the Public Service Loan Forgiveness program have been successful.
“For those of us investigating servicers, it’s so apparent how offensive [IBR] is as a solution,” said Seth Frotman, executive director of the Student Borrower Protection Center and a former student-loan ombudsman for the Consumer Financial Protection Bureau.
One thing both sides agree on: A one-time cancellation of student debt won’t accomplish much if future students continue to borrow similar amounts. Some students might even be encouraged to borrow more, assuming it will be forgiven — a “moral hazard” of debt relief.
To make college more affordable, said Wil del Pilar, vice president for higher-education policy and practice at the Education Trust, Congress should double the Pell Grant and create a federal-state partnership that encourages states to invest in higher ed, he said.
“It’s not enough to cancel debt. If you don’t do other things, you’ll end up in the same place in 10 to 20 years.”
