Schumer Tells Biden To Cancel $50,000 Of Student Loans, But New Research Says Student Loan Cancellation Benefits Wealthy

Student loan cancellation—who does it help most?

Here’s what you need to know.

Student Loans

At a Brookings Institution event Monday, Senate Majority Leader Chuck Schumer (D-NY) renewed his plea to President Joe Biden to cancel $50,000 of student loans, but new research from Wharton Business School and the University of Chicago shows that student loan cancellation benefits mostly wealthy student loan borrowers. If true, this counterintuitive research may raise eyebrows, as many believe that student loan cancellation would mostly help lower income student loan borrowers and others who are struggling financially in the wake of the Covid-19 pandemic. According to the research:

• Student loan cancellation is regressive;
• High income earners — many of whom hold graduate or professional degrees — generally borrow larger student loans;
• The student loan balance for lower income earners “greatly overstate present values”;
• Student loan forgiveness would benefit the Top 10% as much as the Bottom 30% of income earners combined;
• Enrolling student loan borrowers with lower income or who are struggling financially in an income-driven repayment plan “is the least expensive and most progressive policy we consider.”
• Income-driven repayment plans will offer student loan borrowers student loan forgiveness after 20 to 25 years, depending whether they have undergraduate or graduate student loans, respectively.
• Income-driven repayment plans are an effective tool for targeted student loan forgiveness and the benefits largely help middle income student loan borrowers.

The researchers argue against untargeted student loan cancellation and explain in their research the various distributional impacts of student loan forgiveness, including universal student loan forgiveness (everyone get student loan cancellation), capped student loan forgiveness (suh as $10,000 or $50,000 for each borrower), and targeted student loan cancellation (for specific types of student loan borrowers). Sen. Bernie Sanders (I-VT) has proposed universal student loan forgiveness for all $1.7 trillion of student loan debt. Biden has proposed $10,000 of student loan cancellation, and Schumer and Sen. Elizabeth Warren (D-MA) proposed $50,000 of student loan cancellation, both of which are examples of capped student loan forgiveness. Biden has cancelled $3 billion of student loans since becoming president, which is an example of targeted student loan cancellation. There are other ways to qualify for student loan cancellation, such as through income-driven repayment, Public Service Loan Forgiveness and bankruptcy, among others. (The U.S. Supreme Court recently declined to hear a bankruptcy case on student loan cancellation). There are also separate concerns over who ultimately would qualify for student loan forgiveness under the existing proposals for student loan cancellation.

“Many low-income families struggle in making sufficient payments for their balance to decrease substantially – or at all – over time” the researchers write. “However, to the extent that, under current law, their debt will ultimately be forgiven, their balance can greatly overstate the value of actual future payments, and therefore how much canceling their debt would benefit these families financially and how much it would cost taxpayers.”

Student loan cancellation: this research found that student loan forgiveness benefits lower income borrowers

Strikingly, other research shows that student loan cancellation would increase wealth for lower income earners, which reached an alternative conclusion. According to research from The Roosevelt Institute, a non-profit think tank, student loan cancellation would increase wealth for student loan borrowers as follows:

• Top 10% wealth bracket: $562
• 80th-90th% wealth bracket: $1,075
• 70th – 80th% wealth bracket: $1,508
• Bottom 10% wealth bracket (Latinx): $11,090
• Bottom 10% wealth bracket (Caucasian): $12,617
• Bottom 10% wealth bracket (African-American): $17,366

According to this research:

• Student loan cancellation is progressive;
• The largest share of student loan debt cancellation goes to student loan borrowers with the least amount of wealth;
• Student loan cancellation yields the highest reductions in the debt-to-income ratio for student loan borrowers with the lowest incomes;
• $50,000 of student loan cancellation is more progressive than $10,000 of student loan forgiveness;
• There shouldn’t be income limitations on student loan cancellation because it’s administratively burdensome and won’t achieve a progressive aim; and
• Income-driven repayment plans such as IBR, PAYE, REPAYE and ICR are an ineffective replacement for outright student loan cancellation, particularly for student loan borrowers with higher income but lower household wealth.

If you have student loans, remember that you need a game plan. If Congress or Biden enacts wide-scale student loan cancellation, which is not guaranteed, you may not qualify, and any forgiveness you get may only help reduce a fraction of your total student loan debt. Therefore, make sure you are proactive based on your unique financial circumstances. Here are a few smart options to consider:

Student Loans: More Reading

Biden has now cancelled $3 billion of student loans

Do you qualify for $500 million of student loan cancellation?

5 ways Biden can change student loan forgiveness

Do you qualify for $200,000 of student loan cancellation?

Disclosure: Zack Friedman holds an MBA from Wharton Business School.