Student loan forgiveness tied to income requirements would help the largest number of debtors, new research from the New York Fed finds.
The Fed researchers, using data from the New York Fed/Equifax Consumer Credit Panel, estimated the cost of two federal loan forgiveness proposals, one for $10,000 and another for $50,000. They found that limited forgiveness and placing income caps on who would be eligible would "distribute a larger share of benefits" to low-income borrowers while also reducing the cost of forgiveness overall.
"In general, we find that smaller student loan forgiveness policies distribute a larger share of benefits to lower credit score borrowers and to those that live in less wealthy and majority minority neighborhoods (relative to the share of balances they hold)," the researchers wrote in a blog post published on Thursday.
Increasing the forgiveness amount, they added, "increases the share of total forgiven debt for higher credit score borrowers and those living in richer neighborhoods with a majority of white residents."
'The student loan system mirrors many of the inequalities that plague American society'
The payment pause on federal student loans was recently extended through August 31, 2022. The pause was set to expire on May 1 after being enacted by former President Donald Trump amid the coronavirus pandemic in March 2020 and extended multiple times by President Joe Biden.
President Biden backed the forgiveness of $10,000 in student loan debt on the campaign trail in 2020. During his administration, prominent Democrats have repeatedly urged a seemingly skeptical Biden to enact broad-based cancellation of up to $50,000 via executive action (as opposed to legislation passed by Congress).
U.S. President Joe Biden speaks as he meets with Defense Secretary Lloyd Austin, Deputy Defense Secretary Kathleen Hicks and other military leaders in the Cabinet Room at the White House in Washington, U.S., April 20, 2022. REUTERS/Jonathan Ernst ·(Jonathan Ernst / reuters)
Rep. Ayanna Pressley (D-MA) has repeatedly argued that student loan forgiveness is "a matter of racial and economic justice" given the disproportionate burden on borrowers of color.
"Canceling student debt is one of the most powerful ways to address racial and economic equity issues," a recent letter from prominent Democrats, including Pressley, asserted to the president. "The student loan system mirrors many of the inequalities that plague American society and widens the racial wealth gap. Black students in particular borrow more to attend college, borrow more often while they are in school, and have a harder time paying their debt off than their white peers."
According to the Fed researchers, a $50,000 write-off of student debt across the board would cost $904 billion and erase the full balances of 79% of borrowers, with average forgiveness per borrower at about $23,856. A $10,000 write-off of federal student loans would cost an estimated $321 billion and erase the full balance of 31.3% of borrowers, while the average borrower would see $8,478 in forgiveness.
Adding income limits would reduce the cost of these plans. By adding a household income limit of $75,000, the cost of the $50,000 forgiveness plan drops from $904 billion to $507 billion — a 45% reduction. And by introducing a $75,000 income limit to the $10k forgiveness plan, the cost drops from $321 billion to $182 billion.
Who benefits?
By age:
67% of student loan borrowers are under 40. But larger balances are more likely to be held by older students.
If debt were to be forgiven at all, over 60% of the "forgiven loan dollars" would benefit those under 40.
$50,000 in forgiveness would benefit many more older borrowers than $10,000 in forgiveness.
Still, those over 60 benefit the least from forgiveness.
By neighborhood income:
Based on the median income of neighborhoods, the researchers found that adding income caps can target lower-income families better than enacting broad cancellation for all.
Low-income is defined as a median annual income below $46,310 and high-income as above $78,303.
Borrowers in higher-income areas are more likely to hold more student loans and higher balances, the report noted.
Without income caps under the $10k and $50k forgiveness proposals, low-income neighborhoods only receive 25% of the benefit while high-income neighborhoods receive around 30% of cancellation.
The low-income borrower would get fewer dollars forgiven as well: $22,512 versus the $25,054 in forgiveness a borrower in a high-income neighborhood would receive.
A $75,000 income cap would mean low-income areas get a larger share of benefits, increasing their forgiven dollars from 25% to 34%.
High-income neighborhoods would see their share drop from 30% to 18%.
By credit score:
The researchers found that, generally, student loan borrowers have lower credit scores, and those with delinquent debt saw large credit score increases due to the pandemic payment pause.
Forgiving $50,000 in debt would benefit more borrowers who have credit scores of 720 or higher, which is a proxy for higher income levels, the researchers found.
Income caps distribute a larger share of forgiveness to those with lower credit scores, they added.
By neighborhood dynamics:
$10,000 in student loan forgiveness with a $75,000 payment cap would write off a considerable amount of debt held by minority borrowers, the researchers estimated.
Looking at neighborhoods with a large minority population, they found that these neighborhoods hold roughly the same level of loan balances as white non-Hispanic neighborhoods.
But a $10k cancellation policy would knock off 33% of the federal student loan balances for borrowers living in majority minority neighborhoods and 67% for borrowers in majority white neighborhoods. The $50k policy would follow a similar breakdown.
However, an income cap would increase the share of loan forgiveness going to minority neighborhoods from 33% to 37%.
