JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
1
The Right Way to Cancel Student Debt
By Sparky Abraham, Jalil Mustafa Bishop, Daniel Collier, Eduard Nilaj, Marshall
Steinbaum, and Astra Taylor
This issue brief is a collaboration between the Jain Family Institute and the Debt Collective.
Executive Summary
● Student debt cancellation presents a historical opportunity to take decisive action
that will directly improve the lives of tens of millions of Americans, while
providing far-reaching positive economic benefits for everyone.
● The two criteria by which this debt cancellation might be limited—by income and
by total amount—risk undoing the practical and political benefits cancellation is
aimed to achieve.
■ Limiting cancellation by income does not target the neediest borrowers,
and in fact will leave a large number of borrowers with unafordable debt.
■ Limiting cancellation by income will be administratively impractical, as
demonstrated by the current Income Driven Repayment programs, and
will likely miss the borrowers in the greatest need.
■ Limiting cancellation by dollar amount, particularly the low amounts
currently being considered by the Biden administration, will not only miss
huge numbers of borrowers in dire need, but it will also leave millions of
borrowers with the exact same monthly payment they had before, thus
negating the purpose of cancellation.
● Given past experience administering the federal student loan program, as well as
other federal benefits, student debt cancellation should be universal among
borrowers, automatic, and as generous as possible.
● If cancellation must be limited by amount, the amount should be set as high as
possible in order to ofer meaningful relief to the greatest number of people,
bearing in mind that many of those excluded from cancellation by this measure
will be those who have sufered the longest and greatest harm from their student
debt. The arguments for limiting the dollar amount canceled, which claim
cancellation is “regressive,” have been shown to be empirically wrong and
methodologically flawed. The federal student loan program, and the privatized,
tuition-funded higher education system that it supports are regressive. Student
debt cancellation is progressive.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
2
Introduction
Currently, the Biden Administration is actively considering canceling some amount
of outstanding student debt. But the president has said the amount canceled will
certainly not be as much as $50,000 per borrower, and reporting indicates an
application process, complete with an income test, is under consideration.
Limitations on amount canceled, income eligibility, and the inclusion of an
application process would, separately and together, represent a serious political
and policy error. That is particularly true if such a limited cancellation is combined
with an end to the pandemic student loan repayment pause.
In this issue brief, we explain why experience with administering the federal
student loan program indicates that the cost of adding administrative burdens onto
debtors undermines the efectiveness of a debt cancellation program, while also
failing to solve the political problem the proposed restrictions and stipulations are
supposed to guard against. Furthermore, in April 2022, the White House Office of
Management and Budget announced a new initiative to “cut down on
administrative burdens” associated with accessing government benefits.
Establishing an application requirement and/or an income test for student debt
cancellation would directly contradict the administration’s own stated policy in
this respect.
Today, the aim of any efort to cancel student debt should be to liberate as many
borrowers as possible from an unfair and broken system—a system that continues
to be dysfunctional despite serial patchwork reform attempts, all of which have
been instituted to try to draw a distinction between deserving and undeserving
debtors. Those attempts have invariably failed. Given that unsuccessful record,
limiting the cancellation amount and requiring engagement with a broken
administrative system is a recipe for frustration on the part of borrowers.
Moreover, a program of this design would be a political disaster—it promises to
inflame opponents while disappointing supporters.
Echoing other experts, our analysis of existing programs shows that a targeted
approach will likely only exclude and harm the very people it purports to prioritize
and help. Income caps and other administrative hurdles ensure that many of the
most vulnerable borrowers will be denied relief. Many will not be aware of the
opportunity to apply, how to apply, or will be unable to prove their income (a
significant number of low income people do not file tax returns). Only 5 percent of
borrowers make more than the $125,000 cap under consideration by the Biden
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
3
administration. As important, many of the borrowers above the $125,000 income
cap are likely to have zero or negative wealth—especially borrowers of color.
Instead of designing a convoluted, slow, and error-prone system intended to
exclude this small subset of borrowers, we should prioritize swiftly and efficiently
delivering every borrower the relief they are entitled to.
There is a huge opportunity cost for going small and complicated. Big and bold
student debt cancellation is not only popular with the American people, it is the
most practical option—the more balances that are wiped out, the less likely
borrowers are to fall through administrative cracks. To achieve a maximally
beneficial and progressive outcome, student debt cancellation should be universal,
automatic, and as generous as possible.
The Relationship between Student Debt and
Income: Limiting Cancellation Based on Borrower
Income Is Counterproductive
Demands that student debt cancellation be limited on the basis of income arise
from the widespread-though-false perception that student debtors on the whole are
privileged and, in the absence of cancellation, would easily be able to repay their
loans. Thus, so the reasoning goes, cancellation needs to be limited to borrowers
who earn below a given income threshold, so it does not relieve what is assumed to
be a lighter debt burden on more affluent borrowers. Our analysis shows that these
perceptions are false, and scholars making the claim that student debt cancellation
is regressive have resorted to Enron-like accounting gimmicks to mask the total
amount of debt that borrowers are carrying.
1
It is indeed the case that debt-to-income ratios tend to be lower for higher-income
borrowers. However, rising student loan balances, both on the intensive margin
(people who would have borrowed in any case borrowed more) and the extensive
margin (people who previously would not have borrowed now do) have afected
people throughout the income distribution. Figure 1 depicts the median
1
In a report decrying the large forgiveness implied by current IDR programs, researchers at
the American Enterprise Institute concede that IDR cancellation after 20 years of
repayment is not the same as eliminating the burden of student debt in the present:
“Forgiven debt is not equivalent to the full cost of a loan made through IDR…” Like Enron,
such an approach undervalues currently-existing liabilities by claiming their future
repayment will take place on generous terms to the borrower.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
4
debt-to-income ratio for borrowers by census tract median income in 2009–2010
and 2020–2021.
Figure 1: For each of the 2009-2010 and 2020-2021 combined samples, this figure
plots the ratio of the median student loan balance to the median income in the census
tract where each borrower resides, ordered by census tract income decile.
Figures like these have led commentators to naively conclude that if there is a
problem with student debt, it is concentrated among low-income borrowers whose
debt-to-income ratios are likely to be highest. They further reason that the
numerator and the denominator of this metric are causally related: the reason that
debt-to-income ratios are lower for higher-income borrowers is that student debt
causes income to be higher. That reasoning ostensibly motivates some sort of
income test for debt cancellation, figuring that lower-income borrowers are those
for whom their education didn’t “pay of,” and who therefore deserve relief.
More detailed data reveals that this reasoning is flawed. When we look at the
distribution of loan balances among borrowers by census tract income decile,
depicted in Figure 2, we find much more variation within a given census tract
income decile than there is between deciles. Put roughly, the distribution of debt is
more-or-less similar across income bands, especially below the 75th percentile of
the census tract median income distribution. Thus, it’s factually inaccurate to
claim that low-income borrowers (or at least borrowers who live in low-income
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
5
neighborhoods) have low balances, while high-balance borrowers necessarily have
high incomes. While there is a small positive correlation between the amount of
student debt a borrower carries and income, there is not as large a diference as
many commentators believe between the student loan balance distribution
conditional on a given income level and the unconditional loan balance distribution.
There are plenty of high-balance, low-income borrowers, suggesting that in many if
not most cases, student debt does not in fact cause incomes to go up.
Figure 2: This depicts the distribution of student loan balances within each census
tract income decile for the 2021 student borrower sample. There are plenty of
high-balance, low-income borrowers, suggesting that their student debt didn’t cause
their incomes to go up, and who would still be burdened if a small amount of student
debt is canceled. Conversely, there are also many higher-income, high-balance
borrowers who will not be able to repay. An income-limited cancellation won’t benefit
them, but the government still isn’t going to be repaid.
The total amount of student debt taken out (on both the intensive and extensive
margins) between 2009 and 2021 has dwarfed income growth, belying the idea that
a college education “pays of” in the form of higher earnings, and can therefore be
financed without issue by individual-level debt. Artificially limiting the amount of
student debt canceled by income level will, therefore, leave out higher-income
borrowers who nonetheless don’t earn enough to retire their debt, setting up the
strong possibility of recurrent cancellations that have the efect of making previous
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
6
ones appear to have been inefective and inadequate. Simply put, even
higher-income borrowers with high debt loads will never repay their loans, and so
excluding them from cancellation now will only mean their debt will have to be
forgiven later.
Figures 3 and 4 plot cumulative percent changes in median student loan balance as
well as census tract median income from 2009 to 2021, first overall and then
second broken out by race, where race is determined by the plurality race in each
borrower’s census tract (since like income, race is not directly observed in the
credit reporting data). The divergence between income and student debt is largest
for Black borrowers (as determined by census tract), illustrating the racialized
dynamics that have already gotten a great deal of attention in both academic and
public debate. Perhaps the most notable new finding here is the decline in balances
between 2020 and 2021, which may reflect the partial paydown of balances thanks
to both the pandemic repayment pause and the income support policies that made
the COVID-19 recession unique in seeing households improve their economic
security on average even as millions of people lost their jobs. That decline bears
further investigation, but in the meantime, it demonstrates the danger of limiting
any student debt cancellation alongside an end to the repayment pause. Unless the
cancellation amount is substantial and easily accessible to all borrowers,
regardless of income and without an onerous administrative burden, that decline in
balances will not last.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
7
Figure 3: Cumulative percent change in student loan balance and in census tract
median income.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
8
Figure 4: Cumulative percent change in student loan balance and census tract median
income, reported separately by census tract plurality race group.
Given the debt-income divergence, particularly among Black borrowers, limiting
cancellation by income threatens not only to leave behind many in great need of
cancellation, but to do so in a way that disproportionately harms Black borrowers.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
9
In addition to reducing the reach, efectiveness, and salience of cancellation, an
income limit will be nearly impossible to administer. The Department of Education
lacks contact information for about a quarter of the roughly 1 in 5 borrowers who
are in default, despite existing relief programs. The inability of the Department of
Education to access borrower tax data without explicit permission will mean that
even if tax filings could be used to reliably assess income, which they cannot, any
income limit will require affirmative action by borrowers. We know from
experience both within and well beyond the student debt system that such an
affirmative requirement will miss many borrowers, likely millions of them, and is
more likely to miss the most vulnerable borrowers with the greatest need for
cancellation. But even assuming the Department could reliably access and assess
borrower income, administering an income limit in this context is a losing
proposition. The Income-Driven Repayment (IDR) programs provide an instructive
example.
Income Threshold Dysfunction: The Precedent of
Income-Driven Repayment
The Department of Education has extensive experience administering a number of
income-tested programs for reducing the burden of student debt in the form of
IDR. Nine million borrowers, or about 30 percent of the total, are currently
enrolled in IDR. Those programs ofer the best precedent for predicting what
means-testing debt relief would look like, since they are the versions that have
been attempted to be implemented, and at this point we have considerable
experience assessing their efectiveness.
Before recounting the evidence about how IDR has functioned in practice, it’s
important to explain how it works in theory and why it is designed the way it is.
Borrowers with qualifying loans can have their monthly payments limited to a set
percentage of their “disposable” income, usually income above some multiple of
the federal poverty line. To do so, they certify their income by providing tax and
other data to the Department of Education, because the IRS is prohibited by law
from providing individually-identifiable tax data directly to the department. Eligible
borrowers have their monthly payments re-computed to conform to whichever IDR
plan they apply for, either 10, 15, or 20 percent of disposable income, which
determines the repayment term. If the re-computed payment is insufficient to
cover the interest cost of outstanding debt, so-called “negative amortization,” the
unpaid interest accumulates and is held separately; it does not accrue compound
interest. But if the borrower fails to properly certify their income in any given year,
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
10
they automatically fall out of IDR and accrued interest capitalizes into principal,
after which the interest compounds. That is also true if borrowers voluntarily and
consciously exit IDR or fail to qualify because their income is in principle sufficient
to make full payments. All the IDR programs have a repayment term, at the end of
which outstanding debt is canceled if it hasn’t been repaid. In other words,
cancellation already is the policy of choice—IDR as it currently is designed just
wrongly requires borrowers to re-enroll ten to twenty-five times, wait up to
twenty-five years, and make no mistakes.
The premise of IDR is that difficulty with repayment arises from the temporary
mismatch between (low) initial earnings soon after leaving college and high fixed
student debt payments. If that is the problem, then IDR ofers a solution:
temporarily reduce payments to a manageable portion of current income, and then
when the borrower earns enough to make full repayment, the borrower can leave
IDR and pay down the balance, in which case the borrower’s
student-debt-to-income ratio will decline towards zero as they repay. The ten-,
twenty-, or twenty-five-year repayment window is designed to backstop that
structure: if the mismatch between earnings and payments lasts long enough (or
recurs over the borrower’s lifetime), then it’s possible that borrowers will not be
able to fully repay the accumulated balance of principal-plus-accrued-interest
within that term, in which case whatever’s left is canceled.
A reasonable rule of thumb is that an initial student-loan-balance-to-income ratio of
1:1 or higher will result in rising balances over time for a borrower enrolled in IDR,
and if borrowers have that much student debt, they will almost certainly qualify for
it. Figure 5 reports the student-loan-balance-to-income ratio for the borrowers in
2
our 2009 and 2021 samples. Keep in mind that this distribution of ratios is for all
3
borrowers. For borrowers making progress toward repayment, the ratio is
3
Here we use the fact that Experian itself reports a debt-to-income ratio, and since we
separately observe total debt, we can use that to back out individual borrower income, then
compute a student debt-to-income ratio. However, any methodology used to guess a
borrower’s income is opaque, and so that is why we prefer to use ACS income data
elsewhere.
2
Back-of-the-envelope calculations using current interest rates on new student loans,
which in general are lower than historical rates, indicate that a debt-to-income ratio of 60
percent when repayment begins (or thereafter) will lengthen the repayment term beyond
the standard 10 years, and a ratio of 120-130 percent when repayment begins (or thereafter)
will result in continuously-rising student loan balances over time. But it bears emphasis
that these calculations have many significant moving parts and assumptions (most
importantly, relating to lifetime income trajectories, which in many cases do not rise as
quickly as interest is accrued), such that actual borrowers’ experience, for example given
income fluctuations over a lifetime, could be very diferent.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
11
declining as they repay. For borrowers whose debt accumulates faster than their
income rises, the ratio will rise as they age. The latter is the case for borrowers
enrolled in IDR, which is why once a borrower enrolls, it’s likely they’ll never leave.
That fact is baked into the structure of the program, notwithstanding the
assumptions about income shortfalls being temporary that policy-makers assumed
at the outset. More and more borrowers are enrolling (or were, before the
pandemic repayment pause). If the repayment pause is ended in August 2022, that
trend will almost certainly resume. The annual interest rate on federal student
loans has varied between about 4 percent and 6-7 percent for unsubsidized
graduate loans, whereas incomes don’t grow nearly as fast, especially not in real
terms. Nevertheless, the Department of Education’s current policy is that more
borrowers should enroll in IDR, and that the eligibility criteria and performance
requirements ought to be streamlined to accomplish that.
Figure 5: These histograms plot the student-debt-to-income ratio for borrowers in the
2009 and 2021 samples. Income in this case is the income imputed by the credit
bureau Experian.
The IDR programs’ original design did not intend for borrowers to remain enrolled
in them indefinitely (even though the structure of the programs encourages that),
or for the total amount canceled at the end to therefore represent decades of
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
12
negative amortization and/or capitalized interest on top of the principal. But that is
the way it has turned out, because for most borrowers, the mismatch between
earnings and payments sufficient to fully amortize the original balance isn’t
temporary. If a borrower has a high debt-to-income ratio to begin with when they
enter IDR, that ratio is very likely to get worse the longer they stay in it, because
negative amortization and/or capitalized interest in the numerator will accumulate
as fast or faster than income grows over the life cycle in the denominator. The
lower the income is at the start of the IDR program, the more severe the downward
spiral. Lower-income borrowers have more unpaid interest in the earlier years of
repayment, which makes eventual repayment increasingly difficult the longer the
borrower persists in the program. In addition, the lower a borrower’s income is to
begin with, the lower it is likely to be throughout their lives.
In this way, the non-repayment of student loans is a consequence of the
front-loaded structure of financial aid while students are enrolled. In part a
consequence of rising loan limits as students progress through their education,
borrowers often receive decreased aid after their first year of college. Increases in
net tuition as they progress deter students from completing degrees, making it
more likely they’ll leave college with higher debt and no degree or with a delayed
degree from a less prestigious institution, commencing the life cycle of
non-repayment.
Labor market credentialization has been accompanied by proliferation of expensive
graduate programs designed to attract students by ofering them a solution to labor
market slackness, leading to higher amounts of debt. For most IDR enrollees, this
amount of debt is too high to ever be repaid, given their likely income trajectories.
Hence, a large and growing share of IDR enrollees, who are themselves a large and
growing share of student debtors overall, is simply accumulating debt they intend
to have canceled at the conclusion of the IDR repayment period (up to twenty-five
years) and making the minimum required payments in the meantime. In that case,
IDR, and student debt more broadly, is acting as an income tax, with a very high
marginal tax rate on student loan borrowers enrolled in IDR. Recall that unpaid
interest is automatically capitalized into principal if the borrower exits IDR due to
an increase in income, meaning that their student debt would suddenly become
larger and accumulate faster thereafter. These are the unintended consequences of
policymakers’ past unwillingness to confront the harsh reality of the student debt
crisis: student borrowers simply don’t earn enough to repay their loans, and never
will.
That dynamic is central to explaining the perverse outcomes of IDR: borrowers
with low income relative to debt loads are encouraged to enroll and accumulate
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
13
balances, even though the income required to ever pay it of rises much faster than
their actual income grows. Combine this fact with the difficulty of achieving loan
forgiveness through IDR. Only 157 loans have been forgiven as of June 2021,
according to a March 2022 Government Accountability Office (GAO) report. 7,700
loans appeared to GAO to have sufficient qualifying payments, but have not been
forgiven. GAO found another 62,600 loans in IDR that are old enough for
forgiveness but appear not to have sufficient ‘qualifying payments.’ There are a
number of reasons why, perhaps best conveyed by the lengthy footnotes to the
GAO report explaining how loans can qualify for IDR.
This re-prints the footnotes to Table 1 of the Government Accountability Ofice's report
"Education Needs to Take Steps to Ensure Eligible Loans Receive Income-Driven
Repayment Forgiveness," March 2022.
Borrowers have to be enrolled in the right plan; consolidating earlier loans re-starts
the repayment clock, a fact that is not conveyed to borrowers considering
consolidation, unless they ask. Delinquent or defaulted loans do not qualify for
IDR, and neither do loans in forbearance (prior to the pandemic repayment pause)
or subject to deferment. The Department of Education’s National Student Loan
Data System didn’t even track the necessary loan- and borrower-level information
for determining and tracking IDR eligibility until 2014, and when loans are
transferred from one servicer to another, the new servicer has no obligation to
keep track of IDR-eligible payments made under the previous one. GAO concluded
that over 50 percent of the loans it analyzed for forgiveness eligibility had at least
seven years of non-qualifying payment months, meaning that borrowers have made
substantially less progress toward forgiveness than they may believe, or than
analysis that presumes full IDR compliance assumes. Despite the obvious harm in
miscounting qualifying payments, education officials declined to force servicers to
engage in a manual review due to the “costs and complexity.” These outcomes and
lack of urgency by the federal government to ensure the accuracy of borrowers’
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
14
profiles underscore the framing of student loan cancellation as a justice-focused
policy.
All of that presupposes that borrowers can document their income, a prerequisite
to calculate their IDR payment amount. But the Department of Education does not
have direct access to income verification from the IRS or any other agency.
Borrowers who wish to enroll in IDR must provide this information directly, and
they have to recertify their income every year. These tasks are easier for
individuals with stable, formal employment—i.e. the more privileged subset of
student debtors. A February 2022 report by The Pew Charitable Trust cites
multiple analyses that find a varying 20 to 60 percent of borrowers enrolled in IDR
programs fail to recertify their annual income on time. For those borrowers,
delinquency rates increased three-fold, with 31 percent going into forbearance or
deferment. Student debtors also tend to be young, and younger workers tend to
experience higher year-to-year fluctuations in income. These fluctuations open up
the possibility for inconstant qualification for IDR, which would mean intermittent
periods in which payments don’t qualify toward eventual cancellation, as well as
the capitalization of previously unpaid interest.
Right now, the Department of Education is revamping servicing on direct loans in
its so-called Next Gen servicing system, in which reporting requirements will be
ramped up to back-fill the administrative capacity the structure of IDR
presupposed. But that will not be in place until 2023 at the earliest, and it will
never be able to re-constitute the backward-looking payment record that IDR’s
structure requires. We have been here before. From 2015-2020, Congress allocated
over half a billion dollars to the Department of Education to create a single student
loan servicing system. The Department could not deliver. Meanwhile, several of the
major servicers have cut ties in serving loans citing increasingly complex customer
service they have to provide, under threat of legal liability for misleading
borrowers, which appears to be a systemic issue for some servicers. All of this
demonstrates the efort involved in administering a program that is supposed to
track individual performance and worthiness over a span of decades. That these
processes are still being put in place, seemingly in response to the discovery that
the program has not been successfully administered going back decades, illustrates
how dangerous it is to design a complicated program on the basis of someone’s
theoretical notion of how student loan repayment should work or does work,
without the administrative apparatus to ensure it works that way from the start.
According to a 2015 Government Accountability Office Report, roughly 51 percent
of Direct Loan borrowers were eligible for Income-Based or Income-Contingent
Repayment options in September 2012, yet only 20 percent were participating in
September 2014. A 2017 enrollment experiment on federal borrowers serviced by
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
15
Navient found a comparable IDR take-up rate of 24 percent—that “the complexity
and efort required to print, sign, and return the IDR application was negatively
impacting” IDR enrollment.
The administrative burden of IDR plays out in the demographic and economic
breakdown of who enrolls. Generally, it seems that female borrowers and
potentially minority borrowers are more likely to be enrolled in IDR as are
borrowers with above average balances ($40,000+). Additionally, borrowers with
incomes below $55,000 were less likely to be enrolled than borrowers with
incomes between $55,000 and $100,000, even though the design of the program
imagines it to benefit low-earning borrowers. That is probably due to a combination
of the administrative burden on the one hand and lower average nominal balances
on the other, which makes the net benefit of navigating the program higher to
higher-balance borrowers, even if they have relatively higher income. Although, it
should be noted, borrowers earning over $100,000 are less likely to be enrolled in
an IDR program than middle-earners, countering discourse that rather well-of
earners are the primary beneficiaries of these programs. Trying to limit programs
4
to alleviate the burden of student debt to “deserving” borrowers as measured by
current income turns out to result in the opposite of its intended efect.
How Much Should Be Canceled? The More the
Better.
The other axis on which debt cancellation limits have been proposed is a
per-borrower limit for cancellation. This limit has been proposed at levels ranging
from $10,000 to $75,000. It is important to note that much of the reasoning
underlying dollar caps on cancellation stems from the misconceptions around debt
and income discussed above. Many believe that those with more student debt have
higher incomes, and therefore are more likely to be able to pay it of and less in
need of cancellation. This line of reasoning infers, therefore, that canceling lower
balances does more to alleviate the burden of student debt. Unfortunately, as
explained above, this is simply not true. Not only are many borrowers drowning
underneath high debt balances while working as teachers, social workers, or not
able to work at all, but studies have shown that Black borrowers and female
borrowers carry higher balances on average than their white male counterparts. A
4
This paragraph draws on Collier, Fitzpatrick, and Marsicano (2021) “Another Lesson on
Caution in IDR Analysis: Using the 2019 Survey of Consumer Finances to Examine
Income-Driven Repayment and Financial Outcomes.”
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
16
case in point: even if $10,000 of student debt was canceled it would leave 83
percent of Black borrowers who have carried their loan balance for 12 years and
now owe more than they originally borrowed (due to growing interest), still in
some debt. Low levels of cancellation likely will leave already distressed Black
5
borrowers still struggling with repayment. Dollar caps on cancellation will also
leave many of these borrowers behind, will efectively punish those who pursued
advanced degrees to work in jobs with lower pay but higher social value, and will
leave many people in exactly the same financial situation they were in before
cancellation.
This last point is essential: those whose entire balances are canceled will
experience total relief thanks to the cancellation program, but many people who
are left with a balance remaining will see efectively no benefit. This is because
partial cancellation will not afect many people’s required payments. Even for
borrowers on a standard fixed repayment plan, a small amount of cancellation on a
large balance will have little efect. (It will have no immediate efect unless the
6
payment plan is recast using the new balance.) This problem is compounded on
graduated and extended graduated repayment plans, where partial cancellation
will have an even smaller efect on monthly payments.
7
This dynamic is particularly worrisome for the large number of borrowers on
income-driven repayment. Since income-driven payments are generally calculated
without regard for total loan balance, many people who are left with any student
debt after cancellation will have the exact same monthly payment they had before
cancellation. And because these are the people on income-driven plans, they are
likely to be in the greatest need. For this population, a cap on the total amount of
cancellation will mean efectively no benefit.
How much debt should be canceled? Figure 6 plots the total, unconditional
distribution of loan balances in our sample of borrowers aged 18–35, as of the
summer of 2021. Thus, one way to read the chart is as the share of borrowers “left”
7
The same borrower on an extended fixed plan pays $643 per month before cancellation,
and $585 per month after $10,000 of cancellation. That borrower on an extended graduated
plan starts at payments of $454 per month before cancellation, and starts at payments of
$413 per month after $10,000 of cancellation.
6
A borrower with $110,000 of outstanding debt at 5 percent interest on a standard 10-year
fixed repayment plan pays $1,167 per month. A $10,000 cancellation after recast will
reduce that payment to $1,061 per month.
5
Sentence was revised to more accurately reflect the data. May 20, 2022.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
17
if a given total balance is canceled for every borrower. It’s worth pointing out that
8
the age distributions of both student borrowers and student loans is getting older,
and that older borrowers tend to have higher balances (likely due to lower-balance
borrowers managing to repay their loans before they reach a given age). Hence, it’s
likely that the complete distribution of student loan balances unconditional on age
would be shifted somewhat to the right from Figure 6, thus indicating higher
balances.
Figure 6: The unconditional distribution of student loan balances for borrowers aged
18–35, as of 2021. The horizontal axis plots total student loan balance, and the vertical
axis reports the share of borrowers with balance greater than that amount.
Echoing other research, this analysis shows that maximum positive benefits
correlate with higher amounts of per-borrower debt canceled. Though it may
appear, at first glance, to be fiscally responsible and “fair,” any limit on the amount
of debt canceled will be arbitrary. High student debt balances are not as correlated
with high incomes as previous analyses have suggested, and they certainly do not
indicate comfortable borrowers who are able to repay their debt. Rather, those
with higher balances are often those who sought out credentials to battle
discrimination in the labor market, or who pursued advanced degrees to serve
8
Student borrowers with private or refinanced loans would be ineligible for a federal
cancellation, so the chart would under-estimate the share of borrowers left if a given
amount of federal debt is canceled since private borrowers are present in our sample.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
18
their communities, and most frequently are those whose balances have grown and
grown over years or decades of inability to make the interest payments on their
loans. The individuals in these groups who are most harmed by their student debt
will also see the fewest rewards from partial cancellation. Several studies have
found that the more student debt is canceled, the better the outcomes for racial
and economic equity. A relatively small amount of cancellation, in addition to
drawing the same political backlash that any amount of cancellation will bring, has
the added risk of highlighting the millions of struggling borrowers who receive no
relief at all from the program.
The administration should not underestimate the rhetorical and political
consequences of designing a student debt cancellation program that leaves
especially older, Black, and female borrowers in debt, precisely because they
pursued education in the first place that didn’t pay of for them, and then were
buried under years of accumulated interest.
Conclusion
In a far cry from where we were only a few years ago, substantial student debt
cancellation now appears likely in some form. This is welcome news, but not all
cancellations are created equal. If too little debt is canceled, if income limitations
are onerous and impossible to administer, and if some sort of application or
qualification process is included, many borrowers may come away feeling cheated.
At the same time, the actual distributional impact of the program could end up
being the opposite of what those restrictions had intended.
Student debt policy is at risk of repeating the same error that has led to the current
state of extraordinarily high indebtedness among borrowers: the assumptions
about who has the debt and what its efect would be on borrowers’ economic
well-being have turned out to be wrong. State legislatures, colleges, universities,
and employers took advantage of open-handed federal lending policies to jack up
tuition, proliferate expensive graduate degree programs, credentialize the labor
market, and de-fund public institutions. Meanwhile, the notion that student debt
“pays of” in the form of higher earnings can’t be reconciled with rising
debt-to-income ratios and increasing non-repayment of student loans over the life
cycle. If the new policies adopted do not make a significant dent, our current
situation will quickly recur.
JFI & Debt Collective
The Right Way to Cancel Student Debt
May 19, 2022
19
Appendix: Millennial Student Debt Sample
The figures in this publication were constructed from a sample of student loan
borrowers drawn from the credit bureau Experian’s master database of everyone
with a credit report. The sample consists of 1 million student borrowers (with
federal and/or private student loans) aged 18–35 (18–34 in 2009) drawn annually,
from 2009 to 2021, in a repeated cross section. Those borrowers are then matched
to American Community Survey data for the census tract in which they reside.
Census tract income data is aggregated in five-year increments. Individual-level
income, where used (in figure 6) is the income imputed by Experian to construct a
debt-to-income ratio. We do not know what methodology or data sources Experian
uses to impute individual-level income.
