Who Can Benefit from a Studen Loan?

Student loan forgiveness proposals are expensive and potentially use federal spending for other goals, exceeding the cumulative spending on major antipoverty programs over the past few decades.

Spending on targeted policies would better achieve progressive goals, benefiting families with higher poverty, disadvantaged status, and Black and Hispanic populations. This approach is more effective than broad student loan forgiveness. Instead, increasing spending on other safety net programs would be more effective in helping low-income and people of color.

Student loan relief can help those in need, improve economic opportunities, and reduce social inequities if it’s tailored to borrowers based on family income and post-college earnings. Those with high incomes who borrowed for college degrees should not benefit from loan-forgiveness initiatives, as they are not truly struggling borrowers.

The concept of loan forgiveness from a fiscal perspective

Widespread student loan forgiveness would be one of the largest transfer programs in American history, costing taxpayers around $373 billion. Proposals by Senator Bernie Sanders, Senators Warren and Schumer, and President Biden suggest forgiving federal loans, student debt up to $50,000 per borrower, or $10,000 per borrower, with each proposal benefiting different 43 million borrowers to varying degrees.

Forgiving student debt would be a larger transfer than the nation’s spending on unemployment insurance, the Earned Income Tax Credit, and food stamps over the past 20 years. In 2020, 43 million Americans relied on food stamps, and households of three typically earn less than $28,200 a year. The EITC, the nation’s largest antipoverty program, helped 26 million working families in 2018, lifting 11 million Americans out of poverty and reducing poverty for 18 million individuals.

The cost of forgiving up to $50,000 in student debt is comparable to the cumulative amount spent on Supplemental Security Income (SSI) and all housing assistance programs since 2000. SSI provides cash assistance to 8 million disabled or elderly individuals with little income and assets, with about half having no other income.

The federal government has spent nearly twice as much on Pell Grant recipients over the past two decades, despite the cost of forgiving $50,000 of student debt per borrower. Pell Grants are awarded to low- and middle-income undergraduate students with financial need, benefiting around seven million students annually, many of whom are poor and non-white. Who Can Benefit from a Studen Loan?

$10,000 in debt forgiveness would be equivalent to the US welfare spending since 2000, surpassing the school breakfast and lunch program for high-poverty children, and surpassing programs for low-income pregnant women and infants or energy assistance for those struggling to heat their homes in winter.

Who can benefit from similar transfer programs ?

The table outlines the economic and demographic characteristics of beneficiaries of income support programs and student debt forgiveness, revealing that the beneficiaries of student loan forgiveness are typically higher-income, better-educated, and whiter than those of other transfer programs.

Food stamps provide $2,300 annually to households with a median income of $19,000, half of whom are in poverty. Medicaid households earn $33,000, with 34% below the poverty line. Families claiming the Earned Income Tax Credit earn $36,500, with an average annual benefit of $2,200.

The median income of households with student loans is $76,400, with 7 percent below the poverty line. Among those making payments on their loans, the median income is $86,500, with 4 percent in poverty. If debt forgiveness were capped at $50,000, the average benefit to these households would be around $26,000, equivalent to providing a family living on food stamps over 11 years

.Households with student debt are similar to the general population, but with higher education levels. Student loan borrowers are predominantly white and highly educated. While the percentage of white households making payments on student loans is the same as the general population, they are 70% more likely to have a BA and twice as likely to have a graduate degree.

Federal programs like SNAP, EITC, SSI, or Medicaid benefit households with higher Black or Hispanic populations and lower educational attainment. Few have attended college and almost none have a graduate degree. The Census shows 66% of households identify as white, 13% as Black or African American, and 14% as Hispanic, with 42% having a BA and 18% having a graduate degree.

The study suggests that the beneficiaries of universal student loan forgiveness are typically higher-income, educated, and whiter individuals, unlike other programs designed to alleviate hardship and promote opportunity.

Prioritizing spending on targeted programs, such as Biden’s proposal to make the child tax credit fully refundable, can be more effective in achieving progressive goals. This policy would exclusively benefit children living in poverty, benefiting 26.6% of beneficiaries, primarily Black and 29% Hispanic. This progressive change would also benefit many student loan borrowers and those without student loans.

The focus is on providing student loan relief

Utilize the borrower’s financial aid application : The Biden Administration has introduced new tools in the FUTURE Act to simplify the enrollment and retention of students in income-driven repayment plans, such as PAYE, which are effective in providing debt relief and forgiveness to those with low post-enrollment incomes.

Income-driven plans are crucial as student lending remains a significant issue. Even the most ambitious “free college” proposals only reduce new student debt by covering tuition and fees at public institutions. Graduate students, private college students, and those borrowing for living expenses still rely on loans for education, making income-driven repayment necessary to help manage these borrowers effectively.

Biden’s proposal to double the Pell Grant could potentially benefit future students by reducing their undergraduate loan balances by the amount they should have received in Pell plus interest, making debt forgiveness more progressive and focusing on students from disadvantaged backgrounds.

Income-driven repayment : The Biden Administration has introduced new tools in the FUTURE Act to simplify the enrollment and retention of students in income-driven repayment plans, such as PAYE, which are effective in providing debt relief and forgiveness to those with low post-enrollment incomes.

Congress and the Biden Administration can reduce hardships imposed by federal lending by targeting debt relief to low-income students, improving income-driven plans, and implementing forgiveness plans like public service loan forgiveness. However, they cannot do it all, and must weigh student-loan forgiveness against other spending priorities and prioritize what is most valuable.