- Cancel Student Loans Would Benefit This Group More Than Anyone Else
- Betsy DeVos: Cancelling student loans is a bad idea
- Next Steps
- Pay Off Student Loans
- Will you qualify for student loan forgiveness?
- Who benefits from student loan forgiveness?
- High-income earners vs. Low-income earners
- What about private student loans?
- What happens next?
Cancel Student Loans Would Benefit This Group More Than Anyone Else
Cancelling student loans would benefit the wealthiest Americans more than any other group.
Here’s what you need to know.
According to a new working paper from the University of Chicago, cancelling student loans would disproportionately benefit wealthier Americans.
The authors say that student loan forgiveness — which many believe would help student loan borrowers who are struggling financially — would be a regressive policy that would benefit the top 10% of income earners as much as the bottom 30%.
The authors studied the distributional effects of student loan forgiveness in present value terms and found, among other conclusions, the following:
- High Income Earners: Cancelling student loans is regressive because high income earners — most of whom have graduate and professional degrees — generally borrow more student loans.
- Low Income Earners: Low income earners would benefit less than expected because their student loan balances greatly overstate the present value of the financial impact.
- Widespread Student Loan Forgiveness: Universal student loan forgiveness is a sub-optimal policy.
- Income-Driven Repayment: Income-driven repayment plans would be a more effective and less expensive alternative than outright student loan forgiveness. Policymakers may consider two prescriptions: automatic enrollment in income-driven repayment plans or offering greater financial benefits.
- Existing Student Loan Forgiveness: Existing income-driven repayment plans offer substantial student loan forgiveness to low income borrowers for their student loans. For example, after 20 years (undergraduate student loans) or 25 years (graduate student loans), borrowers can receive student loan forgiveness on the remaining balance of their federal student loans. While borrowers may owe income tax on the amount forgiven, they could save thousands or tens of thousands of dollars under existing income-driven repayment plans. Currently, some borrowers may pay as low as $0 per month for their student loan payment their income, family size and state of residence.
- Financial Impact: If Congress cancels student loans for every student loan borrower, an average individual student loan borrower in the Top 10% income bracket would receive $5,944 in student loan forgiveness (present value), while the average individual student loan borrower in the Lowest 10% income tax bracket would receive $1,070 in student loan forgiveness (present value). Households in the Top 30% of the earnings distribution receive almost 50% of all dollars forgiven through universal student loan forgiveness.
“Immediate $10,000 forgiveness of student loans,” President-Elect Joe Biden said last month. “They’re having to make choices between paying their student loan and paying the rent…It should be done immediately.”
Building on a campaign promise, Biden has called on Congress to cancel student loans immediately. Biden supports the Heroes Act, a stimulus package which House Democrats passed earlier this year.
Among significant economic stimulus, the stimulus bill also would cancel $10,000 of student loans due to the Covid-19 pandemic. Importantly, the Heroes Act does not make student loan forgiveness available to every student loan borrower.
Rather, only borrowers who are struggling economically would be eligible.
Some members of Congress and student loan advocates have called for Biden to cancel student loans through executive order. For example, Sen.
Elizabeth Warren (D-MA) and Senate Minority Leader Chuck Schumer (D-NY) have called on Biden to cancel up to $50,000 of student loans through executive order.
However, Biden has not committed to use an executive order for student loan forgiveness, and instead has called on Congress to cancel student loan debt.
Betsy DeVos: Cancelling student loans is a bad idea
U.S. Secretary of Education Betsy DeVos does not support widespread student loan debt cancellation. In a speech this week, DeVos highlighted many reasons not to cancel student loans for every student loan borrower.
Principally, DeVos said it’s unfair to require two-third of Americans who didn’t go to college or who don’t have student loans to subsidize the one-third who did. DeVos also said it’s unfair to former student loan borrowers who already paid off student loans in the normal course and don’t receive compensation.
Ultimately, DeVos has said she wants to balance the needs of both taxpayers and students—and student loan forgiveness is unfair to taxpayers.
Biden now supports a new bipartisan $908 billion stimulus package in Congress, even though it doesn’t include any plan to cancel student loans. Biden may support additional economic stimuli in 2021 after he is inaugurated. Currently, there are 45 million borrowers who collectively owe more than $1.6 trillion of student loan debt.
Still, this accounts for only about one-third of adult Americans. About half of student loan debt is for graduate school, not college, which is typically associated with higher income. The Covid-19 pandemic has disproportionately impacted lower income Americans.
As calls grow to cancel student loans, there are many in Congress and elsewhere that view universal student loan forgiveness as either unfair or untargeted. They also cite other economic priorities such as second stimulus checks, unemployment benefits and state and local aid.
Therefore, if policymakers consider any student loan forgiveness, it may be limited in both size and scope against the backdrop of the greater Covid-19 pandemic and the state of the economy.
Pay Off Student Loans
There are also many reasons to cancel student loans.
Supporters say it save a generation from crushing debt, help young people get married and save for retirement sooner, and help lessen social and racial disparity.
Whether you support or oppose student loan forgiveness, you still need a game plan to pay off student loans now. Here are 3 ways to help pay off student loans, all of which have no fees:
Will you qualify for student loan forgiveness?
Who benefits from student loan forgiveness?
The student loan debt crisis has become a major issue in the U.S., and it's one that President Biden campaigned on.
Biden has proposed several changes to student loans, including urging Congress to immediately cancel $10,000 in federal student loan debt per person.
He also signed an executive order to extend the moratorium on federal student loan payments and interest charges put into place by the Trump Administration until at least October 2021.
Forgiving $10,000 in educational debt is just the latest effort by lawmakers to tackle the student debt crisis, with some Democratic members of Congress — including incoming Senate Majority Leader Chuck Schumer — urging Biden to act via executive order and cancel as much as $50,000 of outstanding loans. Biden hasn't committed to taking this executive action and is instead pushing for congressional action.
Those advocating for student loan forgiveness have touted the benefits the policy would have on everyday Americans, but recent research from the University of Chicago suggests it's the wealthiest 10% who would receive an outsized benefit. Other approaches, such as income-driven repayment, would instead ensure the benefits of student loan relief are targeted toward those who need help most.
If you have private student loans and don't qualify for student loan forgiveness, then refinancing your loans might be your best option. Head to multi-lender marketplace Credible to compare rates and lenders and find the best course of action for you.
Canceling student loans would involve forgiving the outstanding balance of federal student debt. A graduate who currently owes $4,000 of student loans to the Department of Education would owe nothing if Biden forgave up to $10,000 in outstanding money owed.
High-income earners vs. Low-income earners
There's no doubt certain groups will benefit more from student loan forgiveness than others. Here's what you need to know.
High-income earners: If Biden provides universal student loan forgiveness, some of the wealthiest people in the country would experience a disproportionate share of the benefits, according to recent research from the University of Chicago.
The top 30% of households would receive almost half of the total dollars of forgiven debt, while those in the bottom half would get a quarter of the money. And the top 10% of earners would get $5,944 in forgiveness (in today's dollars) while those in the bottom 10% would get $1,070.
High earners benefit the most because they are more ly to have substantial student loan debt. After all, extensive schooling is required to get into some of the country's highest paying industries or to become eligible to work in highly paid positions.
If you have a private student loan or don't qualify for forgiveness right now, you may want to consider refinancing your student loans to ease the financial burden. To see if a refinance fits into your personal finance plans, head to the online marketplace Credible and crunch the numbers. Credible allows you to compare rates and lenders free of charge!
WHAT HAPPENS IF BIDEN'S STUDENT LOAN FORGIVENESS PLAN PASSES?
Low-income earners: Student loan forgiveness would undoubtedly provide benefits to some of the country's lowest earners — if they have student loan payments they're struggling to make.
However, many people in the bottom 10% of the country do not have student loan debt because they did not pursue a college degree.
Among lower-income workers with degrees and debt, programs such as income-driven repayment already provide relief.
Income-driven payment often results in very low monthly payments — sometimes as little as $0 per month — and loan forgiveness can be earned over time.
To learn more about student loan forgiveness or if you're considering a student loan refinance, head to Credible.
5 STUDENT LOAN REFINANCING MISTAKES TO AVOID
What about private student loans?
Congress and President Biden may be able to forgive federal student loans they were provided by the government. But private student loans — which were issued by private lenders — would not be canceled by congressional action or executive order.
Millions of students have taken out private loans to supplement their federal aid and would still owe this money, which tends to come at a higher interest rate and offer fewer borrower protections than federal loan debt.
Borrowers with private student loans should explore the possibility of refinancing, as interest rates today are near record lows. You can use an online student loan refinancing calculator to see what your new monthly payments could be under a refinance loan.
If it's possible you could save on private loan repayment, visit Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.
WHAT QUALIFIES YOU FOR STUDENT LOAN FORGIVENESS?
What happens next?
Since the Biden Administration is currently urging Congress to act rather than taking action by executive order, proposals for canceling student loan debt would ly require 60 votes in the U.S. Senate to overcome a filibuster.
It's unly a bill will advance since Democrats will provide only 51 votes if Vice President Harris acts as a tie-breaker in the 50-50 Senate. However, Biden could decide in the future to test the limits of executive power and forgive debt unilaterally. Student loan cancellation could potentially also be included in a reconciliation bill, which can pass with just a 51-vote majority.
But because you can't count on student loan cancellation — especially for private loans — it's best to explore other options. Visit Credible to find out if refinancing student loans is right for you.
SHOULD YOU STILL PAY STUDENT LOANS IF BIDEN CANCELS STUDENT DEBT?