/ US, STUDENT DEBT

Student debt cancellation is less progressive than universal payments

Over 40 million Americans possess over $1.5 trillion in student debt. And as new borrowers take out loans faster than old borrowers pay them back, that number is increasing with time.

This problem has led to Democrats across the ideological spectrum to advocate for student debt relief. In the 2020 primary, Bernie Sanders had the most generous plan, calling for the cancellation of all outstanding student debt regardless of a person’s income. Also in the primary, Elizabeth Warren proposed cancelling up to $50,000 in student debt, phasing out for households with income above $100,000; in September 2020, she and Senate Minority Leader Chuck Schumer introduced a resolution calling on Biden to cancel $50,000 in debt per person through executive order (the resolution didn’t mention phasing out the cancellation with income). Back in April, President-elect Joe Biden recommended forgiving a minimum of $10,000 of student debt per person.

In this paper, I analyze which Americans would benefit the most from student debt cancellation and examine how it compares to budget-equivalent universal payments. I find that, across a range of distributional outcomes, each student debt cancellation plan would be less progressive than a universal payment of the same total cost.

Who holds the debt?

First, a caveat: data on student debt is incomplete. The Federal Reserve’s Survey of Consumer Finances (SCF) is the primary source of wealth microdata, powering inequality statistics, detailed breakdowns of assets and liabilities, and microsimulations like mine. However, it only counts people in a household’s “Primary Economic Unit,” meaning economically independent young adults living with parents are excluded. As a result, the SCF understates total student debt by about a third, compared to aggregate data sources like the G.19 and Consumer Credit Panel. The missing student debt is disproportionately held by young people and people in the bottom and top income quintiles. While my colleagues and I aim to refine the data, the SCF is currently the best available source for this sort of analysis, so I use it here while acknowledging its limitations.

That said, the 2019 SCF reports $1.1 trillion of total student debt,1 held by households representing one in four Americans. Some demographics are more likely to hold debt than others:2

  • Black Americans are the most likely to have student debt, while Hispanic Americans are the least likely, with 33 percent and 18 percent of people possessing student debt respectively.
  • Young people are more likely to hold student debt than any other age group: 40 percent of people under 35 have student debt compared to just 2 percent of those who are 75 or older.
  • Income quintiles3 follow a bell curve, with the highest amount of debt held by the middle class and smaller amounts held by the lowest and highest quintile.
  • Americans living in poverty4 are less likely to possess student debt than Americans living above the poverty line.

The chart below (and others like it included in this paper) allow you to compare the results across race, education level, age groups, income quintiles, net worth quintiles, and poverty status.

The average person holds about $3,700 in student debt, including those who have no debt at all, with demographic trends similar to the share of households holding debt. As expected, households headed by college graduates possess the most debt, holding 18 times the amount of debt for those headed by people without a high school diploma (whose student debt is ostensibly held by a spouse or child). Those at the bottom of the net worth distribution have more student debt than those at the top. This too is unsurprising as younger people hold a disproportionate amount of debt and the student debt itself decreases one’s net worth.

Comparing $50,000 debt cancellation to a budget-equivalent universal payment

According to the 2019 SCF, the Warren-Schumer proposal to cancel $50,000 in student debt would cost approximately $700 billion, or about $2,300 for every adult and child. What if that $2,300 was given directly as a universal payment?

On average, groups that would receive more money from student debt cancellation include the top two income quintiles, Black Americans, college graduates, and people not in poverty; other groups would receive more from the universal payment.

Average benefit per policy

Share better off in each policy

While Black Americans on the whole receive more under student debt cancellation, 74 percent of Black Americans would be better off with the universal payment. For those at the bottom quintile of the net worth distribution, 65 percent would receive more money with the universal payment. 88 percent of people living in poverty would receive a larger benefit with the universal payment. In total, 82 percent of Americans would be better off with a budget-equivalent universal payment compared to $50,000 in student debt cancellation.

Reduction in net debt rates

Cancelling $50,000 in student debt would lift more Americans out of total debt (negative net worth) than a budget-equivalent universal payment.5 In total, the student debt cancellation would reduce the number of Americans in debt by 44 percent while the universal payment plan would reduce it by 30 percent. This overall trend is mostly consistent across demographic groups. Exceptions include Hispanics, people with no education beyond high school, people at the bottom quintile of the income distribution, and those living in poverty.

Racial wealth gaps

While much of the rhetoric surrounding student debt relief has been centered around the racial wealth gap, a budget-equivalent universal payment would be stronger at reducing the median gap for both Black and Hispanics Americans. Considering the mean racial wealth gaps, universal payments also reduce the White/Hispanic gap more, though student debt cancellation reduces the White/Black gap more.

Inequality impacts

For income inequality (and poverty), I follow IRS guidelines in treating student loan forgiveness as income, though I do not estimate its tax liability. I calculate inequality using the Gini index, which goes from zero (perfect equality) to one (one person holds all the income/wealth). Student debt forgiveness reduces wealth inequality slightly more than a budget equivalent-universal payment; however, universal payments reduce income inequality more.

Poverty impacts

Across every demographic and metric, universal payments would cut poverty rates at a higher rate than student debt cancellation. Overall, universal payments would cut poverty by 52 percent, while cancelling $50,000 in student debt would cut poverty by 14 percent. Hispanic and Black poverty would fall 63 percent and 47 percent under universal payments, respectively, but only 7 percent and 11 percent under student debt cancellation. Student debt cancellation would cut poverty for people in households headed by people without a high school diploma by 1 percent, while universal payments would cut it by 46 percent. Universal payments would even eliminate poverty for Americans in the second income quintile.

Universal payments also outperform student debt cancellation across all demographics on poverty gap reduction. The poverty gap is defined as the sum of the gaps between a household’s resources and its poverty threshold across all households in poverty. The poverty gap would fall 69 percent under universal payments and 15 percent under student debt cancellation.

Comparing other student debt proposals

While this paper focuses on comparing the $50,000 forgiveness currently proposed by Senators Warren and Schumer, I found similar results comparing other proposals. Whether comparing full forgiveness to a budget-equivalent universal payment of $3,650, or Warren’s phased-out $50,000 forgiveness to $2,100 payments, or $10,000 forgiveness to $770 payments, universal payments benefit a larger share of Americans and reduce poverty and income inequality by a larger amount, while student debt cancellation reduces wealth inequality more.

The charts below show how all four plans would impact each metric; for more charts on each plan, see the Appendix.

Conclusion

Because the majority of Americans do not have student debt, the majority of Americans will not benefit from student debt cancellation, no matter the size of the proposal. Student debt cancellation primarily benefits high income earners with a college degree, a demographic likely to see incomes rise over time, while leaving out some of the poorest Americans. Still, Senator Warren and other proponents correctly identify it as a way to cut inequality and the racial wealth gap. Student debt has reached enormous levels, making its cancellation a major program that would benefit tens of millions, and among degree holders, it would disproportionately benefit those from less-advantaged backgrounds.

But the enormity of the endeavor justifies careful comparison to other policies. While student debt cancellation reduces wealth inequality more than universal payments, it mostly underperforms simply sending every American a check on reducing racial wealth gaps. On all other outcomes, it fares even worse: universal payments would reduce poverty and income inequality more than student debt cancellation, regardless of the particular policy design. This analysis may even understate the relative progressivity of universal payments, given it doesn’t capitalize the higher future incomes associated with college education (though limitations of the SCF data may counter that).

Means-testing the student debt cancellation closes some of the gap, but introduces its own challenges. Warren’s proposal is effectively a retroactive additional marginal tax of 33 percent on student debtors’ earnings between $100,000 and $250,000. This would make this group some of the most highly taxed in the country, with total marginal tax rates likely exceeding 70 percent after considering state and federal income and payroll taxes (only low-income benefit recipients would face higher marginal taxes). Retroactive taxation may be constitutional, but it arguably threatens rule of law; people value knowing the payoff to their labor when making decisions about it.

Universal payments have less quantifiable advantages, as well. A one-time debt cancellation excludes both people who recently paid off their student loans, and those about to incur it; universal payments reach all. By favoring college graduates over non-college graduates, student debt cancellation threatens to exacerbate political tensions between these demographics that only rose in the 2020 election. If young people expect future rounds of student debt cancellation, they may also choose to take on more debt, which could in turn raise the cost of higher education.

While student debt cancellation makes progress toward egalitarian goals (and may have the advantage of skipping congressional approval), dollar-for-dollar, those goals are better achieved through universal payments.

Appendix

$10k relief

All relief

  1. The Federal Reserve Bank of New York has estimated total student debt to be $1.54 trillion as of the second quarter of 2020. ↩

  2. Because the SCF collects data at the household level, all demographics are represented by the demographic of the head of household. ↩

  3. I assign households to income and net worth quintiles based on per-capita income and net worth, respectively, weighted by person such that each quintile has the same population. Inequality statistics are also based on per-capita income and net worth and weighted by person. ↩

  4. I classify a household as in poverty if its official 2019 poverty guideline (defined by Health and Human Services) exceeds its total income (including in-kind benefits like food assistance, and in this case, student loan forgiveness). ↩

  5. Calculations around net debt and other outcomes assume that all cancelled debt and universal payments go directly to net worth; that is, consumption is assumed to be constant. ↩