Total student debt in the United States is approximately $1.7 trillion. At the same time, the COVID-19 pandemic has caused historic levels of unemployment and economic hardship. Even before the pandemic, many student loan borrowers faced payment burdens well over 10 percent of take-home income or debt traps, in which they cannot keep up with monthly interest rates (Farrell, Greig, and Sullivan 2020). Government action paused payments and interest accumulation on federal student loans beginning in March 2020 to ease economic burdens brought on by the pandemic. In addition to this temporary relief, policy makers have proposed permanent forgiveness of federal student loans, which represent roughly 92 percent of total student loan debt (Amir, Teslow, and Borders 2020).,
In this insight, we use administrative banking and credit bureau data to estimate how the benefits of different debt cancellation scenarios would be distributed by household income, borrowers’ remaining time to pay off their debt, and borrower race and ethnicity. We examine four scenarios: (1) universal cancellation of up to $10,000 of every debtor’s balance; (2) cancellation of up to $50,000 of debt for people earning less than $125,000; (3) cancellation of up to $25,000 for people earning less than $75,000 and phasing out at $100,000; and (4) cancellation of up to $50,000 with the same income phase-out as scenario 3.
From our linked banking and credit bureau data, we take individual borrowers’ student debt balances, annual income, and debt repayment patterns in 2016 to calculate several aspects of these hypothetical cancellation scenarios. First, how much debt will be cancelled? Second, how is cancelled debt spread across the income distribution—how much goes to high- versus low-income households? Third, how much of the cancelled debt is held by people who are on track to repay their loans on time versus those that may never be able to fully repay? Finally, how is cancelled debt spread across race and ethnicity groups?
We find that income cut offs significantly reduce the total amount of debt forgiven and make cancellation less regressive, while all cancellation scenarios we examine distribute forgiveness across borrowers by race in roughly the same way. The $10,000 universal cancellation would forgive roughly a quarter of all student loan debt, while the income-limited $50,000 cancellation would forgive half of all debt. The $25,000 cancellation with income phase-out cancels the same amount of debt as the $10,000 universal cancellation. Cancellation also disproportionately benefits middle- and high-income families, though income targeting makes cancellation less regressive. This relative regressivity is driven by the fact that higher-income households carry larger debts, often from professional or graduate degrees. Conversely, more aggressive income targeting does not necessarily result in a greater share of forgiveness going to borrowers in a debt trap or facing long repayment horizons. Raising the total cancellation available, however, does slightly increase the share of forgiveness received by borrowers with longer term payoff horizons. The share of cancellation received across race and ethnicity is largely unaffected by income targeting and mirrors the share of total debt held by race and ethnicity.
In general, we find that more aggressive income limits reduce costs and increase progressivity. For example, a $25,000 cancellation phasing out between $75,000 and $100,000 of income forgives roughly the same amount of total debt as the universal $10,000 cancellation (28 versus 27 percent) but gives $3.85 to low-income borrowers for every dollar given to high-income borrowers. A $50,000 cancellation with the same phase-out cancels more debt (39 percent of all debt) and is slightly more regressive but delivers more total forgiveness to low-income borrowers, borrowers facing a debt trap or long repayment horizons, and Black and Latinx borrowers.
It should also be noted that several options available to policymakers were not considered here due to limitations in our data. For example, exempting graduate school debt would likely make forgiveness less regressive and reduce overall costs. Forgiving accumulated interest would also likely be progressive, as people with the means to repay debt are unlikely to have accumulated a great deal of back interest. We discuss these options in the implications section.