Determining who benefits most from student loan forgiveness—the poor, the middle class, or the wealthy—may sound like a simple exercise. But an exact calculation is difficult, according to economists and education experts. In addition to the challenges associated with available data, the future financial benefits that accrue to some borrowers are nearly impossible to model, they said. But the issue has particular significance as the public weighs the merits of President Joe Biden’s Aug. 24 announcement that he would cancel up to $10,000 of federal student debt for most borrowers and up to $20,000 for a subset of borrowers. The relief is also limited to those earning less than $125,000 a year or to married couples or heads of households earning less than $250,000. In remarks after the announcement, Biden said 95 percent of borrowers — 43 million people — would benefit from the debt relief plan. Nearly 45% of borrowers, or nearly 20 million people, will have their debt completely canceled, he said. But which borrowers will benefit the most?
The White House plan assesses individuals, not households
The White House released a chart that breaks down the total dollars forgiven by three income groups. It shows that 87% of the money would go to those earning less than $75,000 a year. None would flow to people earning more than $125,000. Drawing on that data, Biden said the plan would target poor and middle-class people — “families that need it the most.” This is true in at least two ways: The policy sets an income threshold for forgiveness, ensuring that wealthier households cannot participate. And recipients of Pell grants, a type of financial aid for lower-income families, qualify for twice the maximum relief, or $20,000, than other borrowers. Biden cancels $10,000 in federal student loans for most borrowers But the White House analysis measures income per person, not at the household level. Let’s say each spouse in a married couple earns $70,000 a year—she would have $140,000 of the joint household income, but would be included in the group earning under $75,000 in the White House income analysis. The Biden administration felt that breaking down individuals would be more accurate than households, since the U.S. Department of Education data does not show whether a borrower is married, according to a White House official.
“This is not a gift for the rich”
Some institutions have conducted independent analyzes that measure total household impact. Most estimate that low- and middle-income households will receive the bulk of the benefits, but differ on the exact share of those groups in total forgiveness dollars. Economists at the Wharton School of the University of Pennsylvania estimate that households with annual incomes below about $82,000 would receive the largest share — 74 percent — of the total forgiveness funds. These families are in the bottom 60% of wage earners. Those in the bottom half of earners would receive about 55 percent of the forgiveness dollars, according to a separate Penn Wharton analysis for CNBC. “This is not a gift for the rich,” said Kent Smetters, a professor of business economics and public policy at the University of Pennsylvania. “A little bit more relief” is emerging in the bottom half, largely because of the “Pell Grant bonus,” Smetters said. “But it doesn’t particularly target lower-income households as much as other transfer programs,” he added, using the earned income tax credit as an example of existing policy better targeting poor households. About 95% of total benefits flow to households with incomes below $150,000, Penn Wharton found. A White House official said the Penn Wharton study supports its key finding that the vast majority of benefits flow to low- and middle-income earners. The JPMorgan Chase Institute, in a separate study, found that a smaller share — 51 percent — of total debt relief would flow to the bottom 60 percent of households. JPMorgan defines this group as having an income of less than $76,000 per year.
Middle class could see ‘biggest effective income boost’
About two-thirds of the lowest-income borrowers will have their federal student debt completely discharged, according to the JPMorgan study. According to the analysis, black and Hispanic borrowers will be more likely to have their debt discharged than white borrowers. Biden’s policy would give lower-income households with student debt the “largest proportional cut in debt payments” compared to middle- and high-income earners, according to a separate Goldman Sachs report published Aug. 25. Most lower-income households do not have students However, according to the study, there will be no benefit. “We estimate that middle-income households will receive the largest effective income boost from the announced debt relief plan,” the analysis says.
“There is no perfect data” on the impact of forgiveness
So what to do with all this? In short: It is difficult to make definitive statements about which income groups will receive which share of the benefits. For one, each analysis uses different datasets that yield different results. Penn Wharton’s estimate, for example, uses data from the Department of Education and the Federal Reserve’s Survey of Consumer Finances. Because of the data in that Fed survey, while it factors in a parent’s student debt, it may not capture the debt of a recent graduate living at home with those parents, economists said. Meanwhile, JPMorgan’s analysis uses bank data from the credit bureau and Chase. The analysis assumes all borrowers with incomes between $125,000 and $250,000 are married, for example. The bank’s figures suggest this applies to the “vast majority” of these borrowers, but the case skews the distribution of benefits towards wealthier households, according to the analysis. Using data on bank customers can also leave out some with lower incomes, economists said. “There is no perfect data, there is none,” said Dominique Baker, associate professor of education policy at Southern Methodist University. “Even the Ministry of Education does not have perfect data.” Consider other quirks like this: The government awards Pell grants to students based on parents’ income. As long as a borrower’s income is less than $125,000, they will qualify for the Pell Grant forgiveness “bonus” based on their parents’ lower incomes from previous years, Smetters said. There’s also the issue of what “income” should be considered for an analysis of forgiveness benefits, according to Matt Bruenig, economic policy analyst and president of the People’s Policy Project. For example, economists can choose to look at parents’ current income, a student borrower’s current income or a student’s expected future lifetime income, Bruenig said. These kinds of data assumptions yield different results. “We want to do an analysis that we can’t actually do,” Bruenig said.
“There’s all this change in people’s financial lives”
There are also many financial benefits to loan forgiveness that would accrue primarily to low- and middle-income earners, but which cannot be captured in these data analyses, according to education experts. Contrary to popular belief, borrowers with the least debt are more likely to default on their student loans, said Susan Dynarski, a professor of education at Harvard University. Those tend to be low- and middle-income borrowers, he said. Defaults negatively affect credit scores, which can then negatively impact homeownership, hurt job prospects and increase the cost of other lines of credit, he said. “All of that doesn’t count” in income analyses, Dynarski said. “I think it underestimates the benefits of forgiveness, especially for small loans.” More from Personal Finance: Don’t refinance your federal loans while you wait for student debt forgiveness Borrowers in these states may owe taxes on student loan forgiveness GOP could mount legal challenge to block its student loan forgiveness plan Biden Forgiving these relatively small balances may mean less federal dollars flow to these borrowers overall—but forgiving their debts would likely have a huge impact. “There’s all this change in people’s financial lives,” explained Southern Methodist University’s Baker. Many borrowers have defaulted because of failures in the student loan system itself, such as mistakes among student loan servicers regarding income-based repayment plans, Dynarski said. Righting those wrongs by writing off the debt is likely to be worth it, even if it means some wealthier households who “don’t need it” also get a benefit, he explained. “For people with small loans that are hurting to get out of this system, I’m fine with a few middle class people getting forgiven,” Dynarski said. “I consider it a cost of doing business.”
