Nearly six months into Biden’s presidency, the student debt forgiveness he campaigned for is nowhere near coming. This is partly due to the persistence of the idea among some economists and politicians that debt cancellation would be regressive — that it would disproportionately benefit higher-income households.
But a new study disproves this notion, showing that when the effects of student debt cancellation are measured by race and household wealth — not just income — the impact of cancellation is highly progressive, affecting the least wealthy Americans the most. benefits and helps to reduce racial inequality in wealth in the process.
“The myth of regressive cancellation rests on a set of misleading methodological foundations,” write the authors of the study published Tuesday by the progressive Roosevelt Institute. When the effects of severance are measured in terms of household wealth, race, and several other factors, it becomes clear that “it would bring greater benefits to those with fewer economic resources and could play a vital role in addressing the racial wealth gap and the building of the black middle class.”
During the campaign, Joe Biden pledged to cancel up to $10,000 in student debt for most individuals, and to… to forgive all debt for people earning up to $125,000 a year who graduated from public colleges and historically black colleges and universities. But debt cancellation was absent from the sweeping infrastructure package he unveiled in March and his budget proposal for the coming fiscal year. The Department of Education’s review of the presidential debt forgiveness authority drags on quietly for months with no end in sight.
Hesitation about debt forgiveness stems from concern that its benefits would shift to wealthier people. The evidence for this idea largely comes from a 2021 paper by two finance professors, one at the University of Pennsylvania’s Wharton Business School and the other at the University of Chicago’s Booth School of Business. The paper used household income data from the Federal Reserve’s Survey of Consumer Finances to conclude that debt forgiveness “is highly regressive, with the vast majority of benefits accruing to high-income individuals.” This was partly due to the fact that most student debt is in the hands of top earners – the lawyer and doctor class who took out large loans for graduate education, but now have high salaries as a result. If some debt were forgiven, those already well-earning people who borrowed the most would get a bigger discount, the paper argued, which “would benefit the top decile as much as the bottom three deciles combined.”
The authors of that paper found this to be the case with several competing debt proposals. Sens. Elizabeth Warren (D-Mass.) and Chuck Schumer (DN.Y.) have proposed canceling up to $50,000 in student debt, while Biden has expressed more enthusiasm for a plan that limits cancellation to $10,000 in loans.
But the authors of the new Roosevelt Institute study point out that this analysis focused too closely on household income, rather than net wealth, to be a more complete measure of a household’s wealth — and one that takes into account the intergenerational wealth transfers that create economic inequalities that make it easier for some households to pay off their student debt or avoid taking it at all. The authors used the same data from the Federal Reserve to analyze which households would benefit most from cancellation, but adjusted their computing power to focus on wealth. They found that at any proposed cancellation level — $10,000, $50,000, or the $75,000 proposed last year by the Roosevelt Institute — those with the least assets would see the greatest benefit. They created a chart to illustrate how the benefits of cancellation start high for those with lower household wealth, and gradually decline for those with the most wealth:
“Student debt forgiveness represents a progressive wealth transfer at all proposed forgiveness levels,” they write. “In fact, a more substantial plan is the more progressive option.” Compared to Biden’s preferred $10,000 forgiveness option, Warren-Schumer’s $50,000 proposal would result in almost no additional benefit for the absolutely wealthy, the authors say, and an additional $1,000 on average for those in the second-wealthiest group. But it would send more than $4,000 to those in the 20th to 40th percentiles of wealth.
The study authors made a number of other adjustments to their analysis of the data. They removed private debt, as the current cancellation proposals only cover federal loans. They looked at the impact of cancellation on the entire population, including all wealthy people who would not benefit from cancellation because they have no student debt. And crucially, they looked at the distribution of student debt by race, combining race and wealth data to find that black borrowers at all income levels would benefit much more from student debt forgiveness than white households, because of the fact that black borrowers owe almost twice as much as their white counterparts. For example, black borrowers in the bottom 10 percent of net worth would earn about $17,000, and white borrowers in that same category would earn about $12,000. The wealthiest households of all races, meanwhile, would earn an average of just $562 in debt cancellation.
Student debt forgiveness can be considered a form of racial reparations, providing black families and black professionals with transfers of wealth that have been systematically denied to black Americans.