Sen. Chuck Schumer and other congressional Democrats have called on President Biden to cancel as much as $50,000 in federal student loans, but economists warned that such proposals primarily benefit those who are already well-off.
Citing a record $1.68 trillion national student loan balance, Democrats on Thursday urged Biden to use an executive order to forgive student loans, which Schumer called “a huge anchor on our entire economy.”
“There’s very little that the president could do with a flick of a pen that would boost our economy more than canceling $50,000 of student loans,” Schumer said when he announced the resolution, which would forgive all debts for 36 million people, or roughly 80% of all student loan borrowers, according to CNBC.
But a report from the Federal Reserve released in September 2020 found that the majority of student loan debt, roughly 60%, is held by the top 40% of income earners, who account for about three-quarters of all loan payments. The lowest-income earners hold less than 20% of all federal student loan debt by comparison.
“Somehow, people think of people with student debt as among the least well-off, most struggling people in our society, but that’s just not true,” Sandy Baum, a nonresident senior fellow at the left-leaning Urban Institute, told the Washington Examiner.
Undergraduate students can only take out $31,000 in federal loans, and the Federal Reserve found in 2017 that the median federal debt burden on people with a bachelor’s degree was about $17,000.
Most people with more than $50,000 in federal debt have accumulated that debt by pursuing master’s degrees and other professional degrees, according to a Brookings Institution study. A May 2020 report from the Bureau of Labor Statistics that those who hold a master’s degree have an average salary of more than $77,000 — and an unemployment rate of about 2%.
Biden has not expressed support for canceling $50,000 in debt for anyone with federal student loans, but he proposed canceling $10,000 in debt for those with federal loans as part of his coronavirus relief package. In the past, Biden has preferred forgiving debt through legislation, but on Thursday, press secretary Jen Psaki said that the White House was “reviewing whether there are any steps he can take through executive action, and he would welcome the opportunity to sign a bill sent to him by Congress.”
Baum said the real student debt crisis is among those who have small amounts of debt but lack the means to make payments.
“People who go to grad school are the people who can borrow a lot of money,” Baum said. “The people who went to college for a little while and dropped out or didn’t get a degree, they probably owe a few thousand dollars — but if they’re working at the minimum wage or something, they can’t really pay that back. So, much of the debt is held by relatively affluent people, and that really changes the picture of student debt in this country.”
Doug Holtz-Eakin, president of the conservative American Action Forum, told the Washington Examiner that not only does canceling student debt benefit top earners, it also promotes financial irresponsibility.
“If we cancel student debt and we set a precedent and the expectation that debt will be canceled, why would anyone pay for their own college anymore?” Holtz-Eakin asked. “They should just take out debts and expect them to be forgiven, so there’s terrible incentives, and [it] undercuts future lending in a serious way. It rewards the affluent more than it helps the poor.”
“The core objected is to have a well-educated and highly skilled population — canceling debt doesn’t do anything to improve the quality of the education system, the delivery of a quality college education, in particular, so it doesn’t take us toward that,” Holtz-Eakin added.
Consumer Bankers Association President Richard Hunt said that canceling large swathes of student debt fails to address the real problem behind what some refer to as the student debt crisis.
“Focusing on after-the-fact student loan debt alone is a temporary patch which ignores the underlying problem – the skyrocketing cost of college fueled by two decades of federal overlending,” Hunt said in a statement.
“Every dollar of federal lending has been shown to have a direct correlation to increases in tuition,” Hunt added. “Without reigning in runaway lending from the Department of Education, which holds and originates enough student loans to be the fifth largest bank in the country, future borrowers will continue to accumulate mountains of debt.”
Baum said that addressing student debt has to start with reforming student debt relief programs that are already in place so that they help those most in need.
“One of the very important things we already have in place, although it needs to be improved, is that for federal student loans, we have income-driven repayment, which means that you don’t have to pay until your income exceeds.”
IDR plans, which extend the repayment period from 10 years to 25 and forgive remaining balances at the end of that period, account for more than one-half of outstanding federal direct loans. Thanks to those plans, out-of-pocket loan payments on student loans “are concentrated among high-income households; few low-income households enrolled in IDR are required to make payments,” according to the Brookings Institution.
“They do need to be improved, but we have in place a system that says if you can’t afford to pay, you don’t have to,” Baum said. “That’s very important. We don’t want to have people who can’t afford to pay.”
