What will canceling $10,000 in student debt really do?

US student debt stands at $1.7 trillion.
US student debt stands at $1.7 trillion.
Image: Reuters/Emily Elconin
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With an economy in slow recovery, and the burden of education loans higher than ever, US president Joe Biden is facing increasing pressure from Democrats to wipe out $50,000 in student debt per borrower, and to do so via executive action. But Biden suggests more modest measures, saying the government shouldn’t forgive debt for students from “Harvard and Yale and Penn.”

On the campaign trail, Biden pledged to clear $10,000 of federal student loan debt per borrower—a small dent in the more than $1.5 trillion of student loans issued or guaranteed by the US government.

Forgiving $10,000 in debt would completely wipe out the student loan burden for one-third of America’s 43 million federal borrowers, data from the US Department of Education suggests.

But canceling debt would, overall, primarily benefit the rich. Those with incomes above $74,000 owe almost 60% of the outstanding student debt and make almost three-quarters of the payments, according to the Brookings Institution.

The Americans who carry the most debt tend to be the ones getting graduate degrees. Data analyzed by Brookings found that 56% of student debt is owed by those who hold master’s degrees and PhDs. But these borrowers also have better financial outcomes. Those with a master’s degree are expected to earn $2.7 million over a lifetime, versus $1.3 million for Americans with only a high school diploma, according to Georgetown University’s Center on Education and the Workforce.

Will student debt relief stimulate the US economy?

Data from the Committee for a Responsible Federal Budget shows that canceling debt would provide a fairly small boost to stimulate the economy, versus enhancing unemployment benefits and state and local aid. “You’re spending a lot of money to not give people all that much cash,” says Constantine Yannelis, an assistant professor at the University of Chicago’s Booth School of Business whose research focuses on household finances, including student loans.

He says evidence shows that stimulus is most effective early in recessions. But with student loan forgiveness, where you’re forgiving payments over 10 or more years, a lot of the forgiveness presumably will come during good economic times. “So it would be a pretty ineffective stimulus relative to just giving checks to low-income households,” Yannelis says. “There’s a lot of work showing that what matters is getting cash to people immediately.”

But with US student debt currently standing at $1.7 trillion, the calls for canceling student debt are growing louder.

“The discussion has taken off to this extent because so many people are feeling it,” says Nicole Smith, the chief economist at Georgetown University’s Center on Education and the Workforce.

Will canceling student debt help close the race gap?

For those with small debts, the immediate relief of having $10,000 of loans forgiven could make a big difference, Smith argues. Proponents of cancelation point to the psychological effect of carrying debt for decades—and how it could affect people’s career choices or their decision to buy a home. But because canceling debt would not provide an immediate boost to income, it’s hard to analyze what cutting $10,000 of it would do for someone, says Austin Clemens, a computational social scientist at Washington Center for Equitable Growth.

We do know, however, that Black students, on average, take on more debt than their white counterparts to get the same education—and are more likely to be behind on their loan repayment. But canceling all student debt would shrink America’s racial wealth gap by only 3 percentage points, estimates Yannelis. “We’re talking about a drop,” he says. Disparities in homeownership and property values are bigger factors in the wealth gap than education is, he says.

What’s driving the increase in America’s student debt?

While Biden’s policy could provide relief for a lot of borrowers, it would do little to address the root problems with the student loan system—for instance, the high cost of attending college.

The increasing volume of student debt also has been driven in part by more people borrowing and people taking longer to repay their debt, Yannelis says.

But plans meant to protect people from bad outcomes also have taken off. Between 2010 and 2017, the number of borrowers in income-driven repayment plans grew rapidly, as so-called IDR plans, which set a monthly payment that is meant to be affordable based on the borrower’s income and family size, became more widely available and their terms became more favorable. The share of IDR users among borrowers who took out loans for undergraduate schooling increased from 11% to 24%; among those borrowing for graduate school, the share of IDR users rose from 6% to 39%, according to the Congressional Budget Office (pdf).

Can more IDR plans help?

Yannelis says that America’s student-loan system can be improved by defaulting everyone into IDR plans, similar to what’s done in the UK and Australia, where student loan systems are operated by the national tax service. IDR plans are particularly ideal for lower earners, and payments from those whose incomes are too low are not required. Under IDR plans, loan balances generally become eligible for forgiveness after 20 or 25 years.