Targeting Student Loan Forgiveness

Student loan forgiveness is a hot topic. This focus makes sense. With 1.7 trillion dollars of loan debt outstanding and 43 million people holding that debt, the bill comes to just over $39,000 per borrower. Since the wage gap between those with and without a degree is only widening, ensuring that people aren’t saddled with debt for trying to secure economic opportunity should be an important priority.

Fortunately, policymakers are taking notice. For example, Elizabeth Warren, Chuck Schumer, and Ayanna Pressley (among others) have asked President Biden to forgive $50,000 for federal loan borrowers. I like the sentiment. But, I do worry about the specifics.

The problem is that the holding of student debt is unequal in two ways. The first way is that students from lower income backgrounds hold more of it. This inequality suggests that forgiving student debt would make things more equal. But, student debt is also only held by former students (duh). And, former students are more likely to be from advantaged backgrounds and to make decent money. So, forgiving student debt could disproportionately help already advantaged people. This possibility means targeting relief is key. Let’s look at some data to illustrate these points.

Data Cut Method 1: Loan Debt Among Students

If we look within students, the picture will be one where forgiving student debt would appear to improve equality. As a first example, let’s look at the median income of households with at least one former student and that hold their own debt (i.e., not for their kids’ college). It’s pretty clear that households with student debt make substantially less than those without it.

Figure 1. Median Income of Households with at Least One Former Student, 2016

Note: In married households, both partners are examined for the presence of their own student debt. Includes households where respondent age 25-54. Source: Survey of Consumer Finances, 2016.

Other markers of socioeconomic status would tell a similar story. For example, 53 percent of former Black students households’ hold debt. The same number is 39 percent for white households. Yet another way to look at the issue is by parental socio-economic status. Certainly, it seems unfair for some students to start life in debt based on their parents’ ability to pay.

Yet, that’s what happens. A study by Jason Houle explored how parental income and education related to children’s student loan debt. On the income front, he found a bit of a non-linearity. Students with middle-income parents had the most debt, probably because they didn’t qualify for as much need-based aid as lower-income students. But, students whose parents made over $150,000 a year had by far the least amount of debt. On the education front, students whose parents had a college degree had 45 percent less debt than students whose parents did not.

So, when looking at the data for students, the message is clear. Student loan forgiveness would reduce inequality.

Data Cut Method 2: Loan Debt among Everyone

Of course, not everyone attends college. By definition, these people do not hold their own student debt. And, as you know if you read this blog, people without a college education have seen little wage growth over the last forty years. So, if we add these folks into to the “no loan” category, things get a bit complicated.

Figure 2 adds one bar to Figure 1, those without student loans among everyone instead of just among students. This grey dashed bar makes it clear that those with student loans actually make slightly more than those without student loans.

Figure 2. Median Income of Households by Loan and Student Status, 2016

Note: In married households, both partners are examined for the presence of their own student debt. Includes households where respondent age 25-54. Source: Survey of Consumer Finances, 2016.

To look at it a bit differently, consider Figure 3. It plots the share of all student debt held by households at various point in the income distribution. The figure is divided into fifths — e.g., the lowest group represents the 20 percent of households with the least income. The figure shows that those in the lowest earnings group hold just 11 percent of all the student debt in the country. The second highest earning group holds 28 percent, and the highest group 21 percent. So, debt is disproportionately in the hands of higher income households.

Figure 3. Share of All Debt Held by Households at Various Points in the Earnings Distribution

Note: Includes households where respondent age 25-54. Source: Survey of Consumer Finances, 2016.

If we look at the data this way, student loan forgiveness could increase inequality, by forgiving the debt of higher earning households.

It’s Still a Good Idea, but…

I didn’t write this post to trash the idea of student loan forgiveness. Instead, I just want to raise the point that people with student debt have at least some college education, by definition. This fact means that they have some advantage in labor markets relative to others. The simple comparison in Figure 2 makes the point — those with student debt have slightly higher income than those without it. Government programs rarely seek to benefit those with higher income versus those with less.

Which gets me to the point of targeting student debt relief. Within the group of borrowers, huge variance exists in incomes and debt loads. The 10th percentile household with student debt makes just $24,000 a year, the 90th percentile $160,000. Households with debt that completed a bachelor’s degree have a median income of $82,500. But, those that didn’t complete a bachelor’s sit at just $47,000. Given the large variance in income, many plans to reduce student debt have income limits. Currently, it’s a bit unclear whether the executive action being discussed that would eliminate debt would have such limits, and what they would be. Yet, these considerations are important when it comes to the equity of such a policy.

And, income alone doesn’t capture the stress some students are under. The debt load also matters. A useful statistic in quantifying this load is the debt-to-income ratio — i.e., student debt divided by income. The median amount of this statistic is 44 percent for students with loans — e.g., if they had $64,000 in income they had about $28,000 in debt (28,000/64,000 = 0.44). But, it varies…a lot! The 75th percentile debt to income is 88 percent. The 90th percentile is 1.71, meaning the student has 71 percent more debt than annual income!

Indeed, debt-to-income may be a particularly effective way to target relief to those who are least able to pay. After all, it reflects not only the amount of the debt, but also the relative income available to pay it. A person may have got her doctorate in a health field, and thus make a reasonable salary. Yet, she woud also have seven years of loans to pay off. We may want to treat this person similarly as someone with an Associate’s degree and thus lower loan debt, but also a much lower income. An income limit would alone miss the distinction — a debt-to-income comparison wouldn’t.

Obviously, student loan forgiveness is a topic that isn’t going anywhere. Whatever policy we take, we want to be careful to target the benefit towards those that need it, so that money isn’t wasted on those that don’t.

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