Universal Student Debt Forgiveness Is Regressive, Say Economists

“Wiping out student loan debt for American college graduates would benefit the wealthy much more than it benefits less privileged students, according to a new working paper from the National Bureau of Economic Research. “Blacks and Hispanics would also benefit substantially less than balances suggest,” the authors say.

In the paper, titled “The Distributional Effects of Student Loan Forgiveness,” economists Sylvain Catherine and Constantine Yannelis conclude that universal student loan “forgiveness would benefit the top decile as much as the bottom three deciles combined.””

“”There are a number of ways in which debt can be discharged, with important distributional implications. For example, forgiveness can be universal, capped or targeted to specific borrowers. These debt cancellation policies can benefit different socioeconomic and ethnic groups. This paper explores their distributional impacts. We find that the benefits of universal debt forgiveness policies largely accrue to high-income borrowers, while forgiveness through expanding income-contingent loan plans instead favors middle-income borrowers.””

“full or partial loan forgiveness regardless of income and loan size would be “highly regressive, with the vast majority of benefits accruing to high-income individuals,””

The debate over Joe Biden canceling student debt, explained

““No matter how it’s designed, student-debt forgiveness is very poorly targeted,” Bloomberg’s editorial board warned in November. “Even if relief could be better focused on the poor, severe drawbacks remain. For one, the vast majority of Americans who don’t have student debt would rightly feel left out. Many never had the opportunity to get a higher education; others put off financial goals (such as saving for retirement) to pay it down. Also, it would do little to improve the immediate cash flow of the many debtors who — because they’re in default or in income-based repayment plans — are making small or no monthly payments.””

“At the heart of the argument for canceling student debt, especially in the midst of the pandemic, is that it would be good for millions of people and, therefore, the economy. How good is where the disagreement resides — and because mass student debt forgiveness isn’t something we’ve seen in the past, the data on what could happen is relatively limited.
One 2019 working paper from Harvard Business School looked at what happened when students in default had their debt discharged because of a lawsuit. They found that borrowers reduced their overall indebtedness by a quarter and were also less likely to default on other accounts. That’s good for them and for the entities they owe money to.”

“People also demonstrated more mobility — they moved states, changed jobs, and took more risks that often translated to higher incomes.”

““If you give the same type of forgiveness to people that are not in that situation, one effect that we don’t capture is that your monthly payment is going down,” he said. The $300 people were putting toward loan payments every month could then be spent elsewhere.”

I paid off all my student loans. I still support student loan forgiveness.

“I graduated college in 1985 with $18,000 in student loans (about $42,500 in 2019 dollars), and then diligently paid them off over the next 10 years. As a father, I saved enough for my daughter’s education to assure that she could graduate college 100 percent debt-free. I’m not rich. I didn’t always make the best financial choices. But I worked hard, played by the rules, and made good on my debts. I could be the poster child for those claiming student loan forgiveness is “unfair.”

But you know what’s really unfair? The huge advantage I enjoyed graduating into the 1985 job market.”