Most Student Debtors Cannot Make Their Payments. It’s Time for Debt Cancelation

(Truth Out) - In recent years, many centrist economists have claimed that canceling student debt is economically regressive in that it would disproportionately favor higher-income households.

Most Student Debtors Cannot Make Their Payments. It’s Time for Debt Cancelation

Yet, study after study has revealed that this is not the case. In particular, a new study by the Roosevelt Institute explains that the “regressive myth rests on a series of misleading methodological foundations,” demonstrating that, contrary to these regressive claims, student debt cancelation at each proposed level of cancelation — Biden’s $10,000 proposal, Warren and Schumer’s $50,000 proposal, or the Institute’s own proposal of $75,000 — would see those most economically marginalized benefiting the most.

The Roosevelt Institute study authors contend that previous assessments depend too heavily on annual household income, which does not fully account for a household’s overall assets. Instead, they incorporated student debt distribution data by race and household wealth, which is often ignored in studies that show cancelation to be regressive, to demonstrate that canceling student debt is fundamentally progressive while also taking into account the impact of student debt on the entire population, not just student debt borrowers. The authors note that this measure “more accurately depicts the size of the burden experienced by those in lower-income households, for whom each dollar of debt is actually a more substantial barrier to economic security, access to consumer credit, and increases in net worth.” Furthermore, the authors did not include private debt, since only federal student loans are eligible for cancelation under the present student debt cancelation proposals from Elizabeth Warren and Chuck Schumer as well as the Biden administration, while valuing student debt by its costs toward borrowers, not lenders (Bernie Sanders, on the other hand, included private debt in his proposal).

By looking at the share of wealth, not just student debt in absolute numbers, it becomes clear that borrowers in the lower percentiles are much more burdened than their counterparts in the higher percentiles. In other words, student debt makes up a larger share of their annual household incomes or share of household wealth compared to higher percentile households which makes repayment difficult and almost impossible. This is precisely why the study finds that the greatest benefits of student debt cancelation accumulate to those in the bottom 40 percentile for all racial groups. Moreover, by examining the distribution of student debt by wealth and race instead of the standard income variable, cancelation provides ample evidence that the racial wealth gap would narrow in the process. The study’s authors note that Black borrowers would, in fact, benefit significantly more from student debt cancelation than their counterpart white borrowers at every point on the income and asset distribution continuum, reflecting the fact that Black borrowers must borrow more for expenses than white students of equivalent income levels due to the racial wealth gap in family resources. For instance, Black borrowers in the poorest 10 percent of household wealth would receive around $17,000, whereas white borrowers in the same percentile would receive approximately $12,000 under the Warren-Schumer plan. Meanwhile, the wealthiest households across all race groups would benefit from debt forgiveness by an average of $562.

It is critical to emphasise the significance of this study. It is another in a long series of studies that have provided evidence that student debt cancelation is progressive from an economic standpoint. A prominent scholar on the topic, Marshall Steinbaum of the University of Utah, showed that the Warren-Schumer plan would see the lowest earners who owe more than their annual income in student debt owe just one-fifth of their annual income. According to a Brandeis University analysis, 76 percent of student loan holders would have their debt canceled with Warren’s $50,000 proposal.

We have very good reason to believe that canceling student debt provides significant economic benefits that help stimulate the economy, too. Previous research showed that canceling all student debt creates over 1 million jobs per year while increasing GDP by up to $108 billion. Over 10 years, cancelation generates between $861 billion and $1,083 billion in real GDP in 2016 dollars. Freed from the heavy burden of debt, students would utilize the extra money for day-to-day living expenses and pay off other obligations.

As student debt remains in place, it is causing significant and unequal harm to marginalized borrowers, which can only be reduced and remedied by cancelation. For instance, as shown by a recent report from the Student Borrower Protection Center, students of color disproportionately struggle to pay their student debt at a higher rate than white students — creating a vicious cycle of economic inequality along racial lines. The authors note, “America’s student debt crisis is a civil rights crisis.” Additionally, on average, Black graduates owe $7,400 more than white graduates. Thirty-two percent of Black borrowers and 15 percent of Latinx borrowers are in “default” with their payments. In New York, the six communities with the greatest levels of student loan default are largely non-white and centred in the Bronx, even though they have relatively smaller average loan balances.

Moreover, the cost of cancelation is not a straightforward concept since the total amount of student debt owed by borrowers and the costs of cancelation are not the same thing. As Sparky Abraham argues, lending money is a gamble on the future. If a substantial number of borrowers struggle to pay off their debt or die in debt, forgiving all the debt would cost less than the total amount owed, $1.7 trillion. The only way the federal government loses revenue through cancelation is when all borrowers pay back their debt.

That is the direction we are now taking, which implies that the federal government is currently collecting payments and hence, inevitably losing money on a considerably smaller percentage than commonly assumed. The standard system — get the loan, pay it back in fixed amounts over time — only works for roughly a fourth of the loans. A whopping 75 percent of student debt is carried by those who are either not paying or are paying a fixed amount based on their annual income because they can’t afford their normal payments. This suggests that cancelation would cost substantially less than the total owed by borrowers since the federal government would end up losing revenue due to accruing interest and the inability to pay the total balance by student loan borrowers.

But, of course, the economic costs of cancelation should not even be the principal deciding factor. Even if student debt forgiveness is somehow shown to be economically “regressive,” it would be irrelevant. Forgiveness is an ethical matter, regardless of “cost.” The issue at hand is the harm caused to students and its moral implications. By forcing repayment on their student debt, society is dooming its next generation to miserable and suffering lives for essentially nothing other than to increase neoliberalism’s assault on the general population, as Noam Chomsky points out. Thus, student debt — and not its forgiveness — is the truly regressive policy and an unjust imposition.