Who Benefits From Student Debt Cancellation?

As of August 2021, roughly 44 million Americans held a cumulative $1.57 trillion in student debt. Student debt held by Americans has doubled since 2008 and is growing faster than any other form of household debt. In fact, the average household today has nearly four times as much student debt as the average household in 1989 in real dollars. Its urgency is evidenced the fact that every major Democratic presidential candidate in the 2020 election included in their platforms some way to address student debt. Proposals ranged from Joe Biden’s plan to forgive up to $10,000 of all borrower’s debt, along with more expansive relief for undergraduates who attended public schools, to Bernie Sanders’ plan to forgive every last dollar of student debt held by the federal government.

Some of the arguments surrounding student debt forgiveness are normative—what does the public owe students who did as they were told and took on tens of thousands of dollars of debt to finance their educations, only to graduate into poor labor markets where their degrees are not valued? There is also an important empirical question to ask: Is forgiving student debt regressive? That is, does it disproportionately benefit those who are comparatively well-off? Two University of Utah economists, Adam Looney and Marshall Steinbaum, tackled this question and came to different conclusions.

In his article “Putting student loan forgiveness in perspective: How costly is it and who benefits?”, Looney stacks up the costs of the Democratic nominees’ student forgiveness plans against those of other major government transfer programs. The costs of the student debt plans range from $373 billion for Biden’s more modest proposal to $1.6 trillion to forgive all the debt as Sanders proposed. Looney puts these figures in perspective, writing, “Forgiving all student debt would be a transfer larger than the amounts the nation has spent over the past 20 years on unemployment insurance, larger than the amount it has spent on the Earned Income Tax Credit (EITC), and larger than the amount it has spent on food stamps (SNAP).” Even forgiving only $10,000 in debt per borrower would equate to a cost on par with the amount the government has spent on Temporary Assistance to Needy Families (TANF) since the year 2000.

Looney follows his observations by comparing the median incomes of the population served by each transfer program. TANF, SNAP, and the EITC serve families with a median household income between $19,000 and $36,500, and a significant proportion of those households fall below the poverty line. The average annual benefit of households qualifying for these programs ranges from $2,224 for the EITC to $3,625 for TANF. Meanwhile, the median household receiving student debt forgiveness would have an income of $76,400 and would receive an average of approximately $26,000 in relief. Looney argues that to alleviate poverty and inequality, the money spent on student debt relief would be better directed toward these programs, or otherwise targeted to those in comparatively dire financial circumstances. Canceling student debt might not be regressive in the sense of exacerbating wealth inequality, but to Looney, untargeted debt cancellation would be a poor use of government resources.

In “The Student Debt Crisis, Labor Market Credentialization, and Racial Inequality” by Marshall Steinbaum and Julie Margetta Morgan, the authors took a deeper look at why student debt has exploded, how its distribution across the population has changed, and what these changes mean. They found that over the past 20 years wages have remained stagnant or declined regardless of educational attainment. The earnings premium for a college degree remained only because the cost of not getting a college degree increased. Changes in the economy and increased employer power within the labor market means more and more jobs require a postsecondary degree even when one is not strictly necessary or when employees could have expected on-the-job training in the past. This has forced lower-income Americans to borrow money for college educations they did not previously need to remain competitive in the job market.

In his paper “Student Debt and Racial Wealth Inequality,” Steinbaum elaborates, “The set of households with student debt is a relatively disadvantaged, rather than relatively advantaged, subset of the population…the distribution of student debt has been shifting down the distribution of wealth and income.” This is because of the rapid increase in credentialization as well as the fact that low-income borrowers hold on to their debt longer as they struggle to pay it off. Steinbaum also cares much more about the effect of debt cancellation on what he calls the “economic lives” of those who possess it: “Student debt matters less to household net wealth positions the higher you get up the wealth distribution…The significance of this is that student debt matters a great deal for households in the broad vicinity of the middle-class, and it matters especially to black households because it is constitutive of their ability to attain and retain that status.” Steinbaum not only views student debt cancellation as a progressive policy, but also as an opportunity to advance the goal of closing the large, persistent gap between white and black wealth. He states, “across all samples, across all quantiles, the racial wealth gap narrows when student debt is cancelled, and it narrows more the more debt is cancelled.”

Looney is probably correct: applying the money that could be spent on cancelling student debt to other underfunded government transfer programs that are more narrowly targeted to impoverished Americans would be more effective at lifting the least well-off. Unfortunately, there is little hope in the foreseeable future that new legislation will be passed to bolster those programs. But since Americans from varied social and economic backgrounds hold student debt, and the executive branch could forgive the debt unilaterally without involving Congress, student debt cancellation is much more attainable, and for those concerned with wealth inequality, it is worth pursuing.

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Looney, Adam. 2021. “Putting Student Loan Forgiveness in Perspective: How Costly Is It and Who Benefits?” Brookings (blog). February 12, 2021. https://www.brookings.edu/blog/up-front/2021/02/12/putting-student-loan-forgiveness-in-perspective-how-costly-is-it-and-who-benefits/.

Morgan, Julie Margetta & Steinbaum, Marshall. “The Student Debt Crisis, Labor Market Credentialization, and Racial Inequality: How the Current Student Debt Debate Gets the Economics Wrong.” The Roosevelt Institute. October 16, 2018. https://rooseveltinstitute.org/publications/student-debt-crisis-labor-market-credentialization-racial-inequality/

Steinbaum, Marshall. “Student Debt and Racial Wealth Inequality.” Jain Family Institute. August 7, 2019. https://marshallsteinbaum.org/assets/steinbaum-2019-student-debt-and-racial-wealth-inequality.pdf