Who Would Benefit Most from Universal Student-Debt Forgiveness?

Narrator: Young people trying to build a successful life and career can become hindered by high student debt, with the average student loan debt being $35,000. Nationally, student-loan debt has ballooned to $1.6 trillion, making it the largest nonmortgage source of US household debt. Many policy makers, including President Joe Biden, have backed forgiving some or all of the student-loan debt held by the federal government. But who benefits from that forgiveness would depend largely on how it’s structured. University of Pennsylvania’s Sylvain Catherine and Chicago Booth’s Constantine Yannelis ran the numbers to see what happens when we forgive large amounts of student debt.

Constantine Yannelis: There’s a common view out there that forgiving student loans is a progressive policy. And if you define that as lower-income people benefiting from the policy, it turns out that that’s not true. And our research shows that higher-income people will receive most of the benefits of student-loan forgiveness.

Narrator: The researchers used publicly available data from the Survey of Consumer Finances, which is administered by the Federal Reserve. The survey has information on earnings, student-loan balances, and repayment plans. They find that, unsurprisingly, people who go to college tend to earn more than those who don’t, and people who go to expensive schools or pursue expensive degrees tend to earn far more than those who pursue cheaper options, like associate’s degrees or degrees at public schools. Partly as a result of these dynamics, a policy that forgave all student debt would provide high earners with six times the amount of forgiveness as low earners.

Constantine Yannelis: And because high-income people are more likely to pay back their loans, when you account for who’s already receiving forgiveness and who is not going to repay their loans, even more of the benefits will end up going to high-income individuals.

Narrator: The balance of benefits doesn’t get more progressive under a policy of capped forgiveness.

Constantine Yannelis: So it turns out that some of these capped policies are even more regressive than uncapped policies. And the reason for that is for very low-income borrowers, if they’re not even going to pay $10,000, over the long run, they’re not going to benefit from a $10,000 loan forgiveness.

Narrator: But there is an option for loan forgiveness that targets people further down the income distribution. In fact, we’re already using it.

Constantine Yannelis: One thing that’s often missed in much of the public debate is that we already have a very substantial progressive loan-forgiveness program, and that’s called income-driven repayment. So these are plans that link a borrower’s payments to their income. Depending on the particular plan, borrowers pay 10 or 15 percent of their income above a threshold, which now is 150 percent of the poverty line. And then, after a certain amount of time, there’s loan forgiveness. So again, depending on the particular plan, and there are a lot of different plans with the same basic features, but borrowers see forgiveness after 20 to 25 years.

Narrator: If policy makers want to direct more loan forgiveness to lower-income people, one way to do that is to increase the generosity of income-driven repayment.

Constantine Yannelis: So for example, they could make payments start at a 300 percent of the poverty line rather than 150 percent of the poverty line. We could have forgiveness after 10 years rather than 20 or 25 years. Borrowers could pay, say, 5 or 7.5 percent of their income rather than 10 or 15 percent.

Narrator: Not only would this give five times more forgiveness to low-income households; its fiscal impact would also be smaller, and its benefits more durable.

Constantine Yannelis: If there’s a one-time debt jubilee, we’re going to have the same problem in another couple of years because we’re not solving the underlying problems that led to a large accumulation of student debt for many borrowers who can’t afford these debts. I think in terms of policy, we want to be thinking about longer-term solutions not quick fixes, and making income-driven repayment easier to enroll in, or modifying plan terms is something that would be permanent and could affect borrowers going forward.