Who Benefits from Blanket Student Loan Forgiveness?

The media is replete with articles speculating about President Biden’s across-the-board  student loan debt relief plans, given that federal student loan debt exceeds $1.6 trillion spread across 43 million borrowers, according to the Federal Student Aid portfolio summary for 2022. These plans for broad-based forgiveness extend beyond the existing pause on student loan payments implemented through COVID-19 emergency relief, Public Service Loan Forgiveness Program waivers, and forgiveness for borrowers defrauded by for-profit institutions and borrowers with disabilities.

Specifically, the administration is considering plans to forgive $10,000 for nearly any kind of federal loan, including graduate PLUS loans, commercially held loans through the Federal Family Education Loan program, and parent PLUS loans, and income caps may be used to determine eligibility. Other previously floated proposals included plans to forgive $50,000 in student debt. Studies, including those by the Brookings Institution, the National Bureau of Economic Research, JPMorgan Chase & Co., and the Federal Reserve Bank of New York, have attempted to examine the benefits of some of these proposals.

Our analysis goes a step further in examining the projected impacts of these student debt relief plans for U.S. households by focusing across both income and racial lines. To provide these insights, we use the most recently available data from the Survey of Consumer Finances for 2019. These data are nationally representative and provide comprehensive information on families’ finances and demographic characteristics.

How many households might benefit?

Of the 128.6 million U.S. households, 27.5 million (21.4 percent) hold student debt. We estimate that under the $10,000 relief plan, 6.6 million households will be free of student debt and 17.4 million will continue to hold student debt after receiving forgiveness. Meanwhile, under the $50,000 relief plan, 17.2 million households will be free of student debt and 6.8 million households will continue to hold student debt after receiving forgiveness.

How much debt could be forgiven?

We estimate the $10,000 relief plan to cost $206.4 billion and to forgive an average of $8,609 per household. The $50,000 relief plan is estimated to cost $626.7 billion and to forgive an average of $26,133 per household.

Who benefits from forgiveness?

By income quintile

We split the U.S. households into five income groups, or quintiles: households in the lowest (first) income quintile have annual incomes below $26,027, whereas those in the highest (fifth) income quintile have incomes above $127,264 (figure 1). The figure shows that both relief plans would benefit households at all income levels. Average forgiveness would range from $7,961 for households with the lowest incomes to $8,893 for those with the highest incomes under the $10,000 relief plan and would range from $20,677 to $28,202 under the $50,000 relief plan.

Figure 1

Figure 2 shows that households near the middle of the income distribution (third and fourth income quintiles) would receive the most debt relief under either plan.

Figure 2

By income and race and ethnicity

Figures 3 and 4 show how projected federal student loan debt forgiveness under both relief plans would differ by income and race and ethnicity. Both relief plans are regressive, meaning that the average amount in student debt forgiveness increases and federal student debt burden decreases as incomes rise. However, this result holds only up to a certain level of income beyond which results differ.

• Under both relief plans, the average amount of student debt forgiveness would increase with income up to the fourth income quintile for White households.
• Under both relief plans, the amount of student debt forgiveness would increase with income up to the third income quintile for Black households. 
  • Under the $10,000 relief plan, Black households with the lowest incomes would receive a higher share of the group’s total debt relief than those with the highest incomes.
  • Black households with middle incomes (in the third income quintile) would receive the highest share of within-group total debt relief under both plans.
• For Hispanic households, results are mixed. Under the $10,000 relief plan, the amount of student debt forgiven would increase with income up to the third income quintile, but under the $50,000 plan, student debt forgiveness would increase with income up to the fourth income quintile. 
  • Hispanic households between the second and fourth income quintiles would receive the greatest share of the group’s debt relief.

Figure 3

Figure 4

Examining the $10,000 relief plan by race and ethnicity only, we estimate that

• 15.3 million White households will receive a total of $132.7 billion in forgiveness, which averages $8,658 per White household;
• 5.5 million Black households will receive a total of $47.8 billion in forgiveness, which averages $8,610 per Black household; and
• 2.1 million Hispanic households will receive a total of $17.2 billion in forgiveness, which averages $8,171 per Hispanic household.

Conclusion

The impact of student loan cancellation should be considered across both income and racial lines. The extent to which both the $10,000 and $50,000 relief plans decrease student debt burdens across different income and racial and ethnic groups will depend on the income caps used to determine eligibility. For instance, if only households with incomes below $125,000 were eligible for forgiveness, all households in the highest income quintiles would lose out on the benefits of debt relief under both plans. In addition, figure 5 shows that Black and Hispanic households would lose out disproportionately relative to White households with such an income cap. Studies, such as one published in the Journal of Consumer Affairs, have shown that student debt contributes to racial wealth gaps, and these effects are exacerbated at the upper end of the wealth distribution. Thus, the impact of means-tested eligibility on minority borrowers should be considered when crafting broad-based student debt relief policies. Finally, debt relief policies alone cannot address the well-documented structural issues associated with student loan debt burdens.

Read more in the technical appendix.