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At the same time, the COVID-19 pandemic has caused historic levels of unemployment and economic hardship. Even before the pandemic, many student borrowers faced the burden of paying more than 10% of their household income or facing debt traps that they could not afford the monthly interest rates (Farrell, Greig, and Sullivan 2020) . Government action halted payments and interest accrual on federal student loans, beginning in March 2020, to ease the economic burden caused by the pandemic. In addition to this temporary relief, policymakers have offered permanent forgiveness of federal student loans, which account for approximately 92% of total student loan debt (Amir, Teslow, and Borders 2020).
With this in mind, we use Administrative Bank and Credit Bureau data to estimate how the benefits of different debt forgiveness scenarios are distributed by household income, time owed by borrowers, and race and the nationality of the borrowers.
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We consider four scenarios: (1) universal cancellation up to $10,000 in each debtor’s balance sheet; (2) debt cancellation of $50,000 for people with an income of less than $125,000; (3) Withdrawal up to $25,000 for less than $75,000 of income and gradual withdrawal up to $100,000; And (4) a cancellation of up to $50,000 with the phasing out of the same income as Scenario 3.
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From our bank and credit data, we take individual borrower balances, annual incomes, and debt repayment patterns for 2016 to calculate certain aspects of these hypothetical cancellation scenarios. First, how much debt will be written off? Second, how is canceled debt distributed across the income distribution – how much goes to high-income households? Third, how much of the canceled debt do people who intend to repay their loans on time have versus those who may never be able to repay it in full? Finally, how does canceled debt apply to races and ethnicities?
We find that stopping income significantly reduces the total amount of canceled debt and makes cancellation less regressive, while all of the cancellation scenarios we discuss distribute cancellation among borrowers by race, roughly from the same way. A $10,000 universal waiver cancels about a quarter of a student loan, while a $50,000 limited-income waiver cancels half of the total debt. Cancellation of $25,000 with progressive cancellation of income, cancels the same amount of debt as a universal cancellation of $10,000. Abolition also disproportionately benefits middle- and upper-income households, although targeted income inclusion makes abolition less regressive. This relative regression is due to the fact that high-income families have larger debts, often professional or educational. Conversely, more aggressive income goals do not necessarily result in a greater share of borrowers moving out of the debt trap or the long-term repayment horizon. However, increasing the amount of total cancellation available slightly increases the share of forgiveness received by borrowers, with a long-term repayment horizon. The share of cancellations derived from race and ethnicity does not have a significant impact on revenue targeting and reflects the share of total debt by race and ethnicity.
For example, a write-off of $25,000 with a phase-out write-off of income from $75,000 to $100,000 writes off all debt by roughly the same amount as a universal write-off of $10,000 (28% vs. 27% ), but gives $3.85 to low-income borrowers. Every dollar transferred to high-income borrowers. A $50,000 write-off with the same phase-out writes off more debt (39% of total debt) and is slightly more regressive, but grants more forgiveness to low-income borrowers, borrowers who are trapped in debt, or long term borrowers, and black and white borrowers.
It should also be noted that several options available to policy makers have not been considered here due to the limitations of our data. For example, debt relief for a graduate school is likely to make the discount less regressive and reduce overall costs. The forgiveness of accrued interest is also likely to be gradual, as people with debt repayments are less likely to accumulate large amounts of retroactive interest.
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Figure 1 shows the total amount of debt canceled in each scenario. Since we only observe household income in our current account data, we translate the total income reductions into the net income limits of $75,000, $100,000, and $125,000 from $54,263, $72,350 and $90,438. 20% of the withholding tax rate and 7.65% of the additional wage tax rate.
A withdrawal of $50,000 with an income limit cancels the largest debt (50% of total debt), which is $786 billion out of $1,566 billion. A more aggressive revenue limit, such as phasing out revenue from $75,000 to $100,000, significantly reduces total canceled debt (39% of debt or $606 billion) to the same cancellation potential of 50,000 $ for individuals. A $25,000 waiver through phase-out further reduces total debt forgiveness (28%, $446 billion), while a $10,000 universal waiver does not significantly reduce a total debt forgiveness beyond (27%, $422 billion), despite an amount of forgiveness. . Are given to individual borrowers. Taken together, these alternatives will leave between $919 billion and $1.283 billion in federal and private student loans, at 2012-14 levels.
Note: Based on $1.6 trillion in total outstanding student debt. It is assumed that the gross income limits translate to a household income limit based on a federal withholding tax rate of 20% and a payroll tax rate of 7.65%. The income limit limits cancellations for people who earn less than $125,000 a year. “Phase Shutdown” allows full rollbacks for people earning less than $75,000 per year and reduces rollbacks as income increases so people earning more than $100,000 don’t receive rollbacks.
Is Taking On More Student Debt Bad For Students?
We find that a disproportionate amount of debt cancellation goes to middle- and high-income families under all scenarios we consider canceling because higher-income households have more student debt. However, a more aggressive revenue goal can make the program much more progressive.
The left panel of Figure 2 shows how much of the total cancellation dollar goes to each income quintile and each quintile’s income limits.
Two-line diagram. The bar chart on the left shows the distribution of cancellation dollars by income quintile. The bar graph on the right shows the share of each quintile group whose student debt is completely forgiven.
Note: Based on November 2016 balance sheet. Income is income deposited to the Chase checking account from December 2015 through November 2016. The income limit limits rollbacks for people who earn less than $125,000 per year. “Phase Shutdown” allows full rollbacks for people earning less than $75,000 per year and reduces rollbacks as income increases so people earning more than $100,000 don’t receive rollbacks. It is assumed that the gross income limits translate to a household income limit based on a federal withholding tax rate of 20% and a payroll tax rate of 7.65%.
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Under a $10,000 universal cancellation (shown in blue), only 12% of the cancellation dollar goes to the lowest quintile (i.e. the lowest 20% of income), while 23% go to the highest quintile. Under the $50,000 (green) limited income scenario, the highest income quintile receives almost no rebate because the vast majority of people in the top quintile exceed the $125,000 total income limit (limit of net income of $90,438). However, the discount rate for the lowest income households is only slightly higher (14%), while the share of borrowers in the 3rd and 4th quintiles is higher. This is due to the balance of higher income households, such as higher debt for vocational schools, medical schools, etc. The scenarios with gradual income cancellation, with $25,000 and $50,000 canceled, are distributed very similarly across income groups, giving relatively more relief to borrowers in quintile 1, while middle-income borrowers (quintile 3) always receive about twice as much. As borrowers in quintile1.
The right panel of Figure 2 shows which part was forgiven for each quintile. The $10,000 universal waiver will completely eliminate student loan debt for 48% of the lowest income group and 32% of the highest income group. The $50,000 cancellation policy avoids debt for 87-90% of borrowers in the top three quintiles. Note that the two $50,000 policies yield nearly identical results in this income range, as no scenario income limit applies to quintiles 1 and 2+ per quintile. Options of $50,000 (70-75%).
This dynamic is not surprising given the distribution of balances in each income quintile, as shown in Figure 3. For example, a median debt holder in a quintile has a balance of just over $10,000 and a $10,000 universal void is totally forgivable. About 48% of borrowers in this quintile need, as indicated
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