In 2011, when the Occupy Wall Street movement called the nation’s attention to the wealth-and-income gaps between the top 1 percent of the population and everyone else, activists began to promote the idea of forgiving student-loan debt. Those in the Occupy Student Debt campaign argued that all current education debt should be eliminated immediately. They asserted that policies such as limiting loan payments to an affordable share of income were “micro-cosmetic,” and that creditors needed to free debtors from their “bondage.”
At the time, only a small minority of people subscribed to the idea, but recently it has gone mainstream, with Democratic presidential candidates Elizabeth Warren and Bernie Sanders proposing broad student-debt forgiveness policies. To help families cope with financial pressures during the Covid-19 crisis, the Democratic Party platform calls for up to $10,000 in student-debt relief per borrower. Longer-term provisions in the platform include forgiving all debt on undergraduate tuition loans for those who earn under $125,000 and who attended public institutions. That benefit would also apply to those who hold tuition debt from attending historically Black private colleges and universities.
Democrats included a student-debt relief provision in their proposals for the Covid-19 rescue package. Ultimately, the Coronavirus Aid, Relief, and Economic Security Act of March 2020 suspended loan payments and waived interest for six months but did not include debt forgiveness. The payment waiver now extends to the end of the year.
Proponents of large-scale erasure of education debt characterize the idea as progressive, in part because such a policy, which would benefit relatively affluent people, might be financed (as Bernie Sanders proposed) by people who are even better off. Truly progressive policies, though, provide disproportionate benefits to households in the lower reaches of the income distribution. They are designed to diminish the gaps between the haves and the have-nots.
The realities of student debt in our country make it clear that proposals to eliminate these obligations do not meet the criteria for progressive policies. Households in the upper half of the income distribution hold more student debt than those in the lower half. The highest-income quartile of households owes about one-third of that debt; the lowest-income quartile owes about 12 percent. People who don’t go to college don’t have student debt. They have lower incomes and more constrained job opportunities than others.
There are some people who borrowed and either didn’t complete their programs or never saw the anticipated earnings payoffs to the credentials they did earn. These individuals make up a large share of the low-income adults who do hold student debt. The circumstances of these borrowers explain why the government has developed an income-driven repayment system for federal student loans. The system is far from perfect, but it does not require payments until a borrower’s income exceeds 150 percent of the poverty level and then generally requires payments equal to 10 percent of the borrower’s income beyond that level. Those whose incomes never support affordable repayment of their debts will see their remaining balances forgiven after 20 years (or 10 years for those with public-service jobs and 25 years for those with graduate school debt).
Just 7 percent of borrowers owe more than $100,000 in student loans. This small share of borrowers owes more than one-third of the outstanding balances. Doctors and lawyers and MBAs have lots of debt, but they also tend to have high incomes. About 40 percent of federal student loans go to graduate students each year. There are strict limits on how much undergraduate students can borrow from the federal government—$31,000 total for those who are dependent on their parents and $57,500 for those who are older, married, or otherwise independent of their parents. Graduate students, though, can borrow virtually unlimited amounts.
More than one-third of borrowers owe less than $10,000. They hold just 5 percent of the outstanding student debt. Many of them are the borrowers who struggle most to pay back their loans because their limited skills restrict their job opportunities.
In short, forgiving all student debt would deliver a big windfall to a few people: those who can afford to pay. Virtually all of those with the largest debts have bachelor’s degrees, and most have advanced degrees. That is not a progressive policy.
The CARES Act provided for one-time relief payments of up to $1,200 to individuals making no more than $99,000 annually. The idea of sending checks to everyone did not survive—there is an income limit. Maybe there should not be an income limit. Maybe the checks should be much bigger. But would anyone explicitly propose sending checks only to those who went to college? This would be shocking even absent the reality that highly educated workers are more likely than others to be able to work remotely. Many of the restaurant workers, taxi drivers, retail clerks, and maintenance staff who have lost their incomes did not go to college and do not have student loans. If they do have loans, they may well not have been required to make payments even before the implementation of the waiver and might eventually have their debts forgiven under existing policies.
The call to relieve each borrower of up to $10,000 in debt would be akin to sending a check in that amount only to those with outstanding student loans. Quite a few people in addition to those who never went to college would be left out under such a policy: Borrowers who have just finished repaying their loans, for instance, and students who worked long hours to avoid borrowing. Imagine college classmates from similar families who borrowed similar amounts. Student A decided to work hard to pay off all his debt before following his dream to try to make it as a musician. Student B decided to travel around the world and postpone paying her loans. Now, under loan forgiveness, the taxpayers will repay Student B’s loans, but Student A, who paid back every dime on his own, will receive no such benefit.
What about borrowers who put their student-loan payments on their credit cards to avoid default? They’d be out of luck. What about those Americans who have debt from medical procedures? From utility bills? From payday loans? Or fines that accumulate when debts go unpaid?
Aside from all of these inequities, one-time elimination of student debt makes little sense if future students will continue borrowing similar amounts. Some students might even feel encouraged to borrow more in the hope that those debts, too, will be forgiven. Many advocates hope that college will become tuition free, solving this problem. But the reality is that “free” college will not eliminate borrowing for college. Public colleges are already essentially tuition free for a large share of low-income students, because Pell Grants and state grants cover those charges—but many of those students still borrow to cover living expenses. In fact, students who pay no tuition graduate with almost as much debt as those who do pay tuition.
We should forgive some student debt, such as that carried by students who borrowed for education that did not pay off or who were defrauded by their schools. We already have separate policies to deal with those issues—policies that should be simplified, improved, and carried out.
Universal forgiveness would benefit many students from relatively affluent families who attended expensive private colleges. It would also be a gift to those who borrowed for graduate school. The Congressional Budget Office recently examined the potential cost of the existing income-driven repayment plans designed to protect borrowers from unaffordable debt payments. The study found that 20 percent of those in repayment are graduate borrowers. These borrowers owe half of the funds that are now in repayment. So, half of the benefit of forgiving that debt would go to people who went to graduate school.
Wiping out the student debt of borrowers who took these loans to invest in themselves and who are reaping the benefits of their education is not a progressive policy. Most of these individuals will have increased earnings potential and a wide range of opportunities throughout their lives that would not otherwise have been available to them. The federal government is right to provide the loans that create these opportunities. Eliminating the federal student-loan program or restricting its ability to serve students who have not yet proven themselves would erode opportunities for upward mobility. The government should continue to offer student loans while ensuring that students can’t use those loans at very poorly performing institutions and that borrowers don’t have to make payments that would deprive them of the ability to meet basic needs.
The economic crisis wrought by the pandemic has highlighted the sad reality that too many Americans were living on the edge even before the virus hit. Some of the people now facing the most serious struggles do have student debt, and they need a lot of support—not only so they can keep up with their education debt but also, more urgently, so they can pay rent, have enough to eat, and provide for their children. The majority of student debt, however, is owed by people who are in better circumstances than most Americans.
Student-debt relief should be a targeted policy that is part of a truly progressive agenda—not a special-interest subsidy that disproportionately helps a segment of the relatively privileged.
This article appeared in the Winter 2021 issue of Education Next. Suggested citation format:
Baum, S., and Akers, B. (2021). The Fallacy of Forgiveness: If the Feds wipe out student debt, who will benefit the most? Education Next, 21(1), 80-85.