Canceling All US Student Debt Would Mostly Benefit High Earners

There are two primary reasons why the better off would benefit most, Catherine and Yannelis explain.

First, as prior analyses have shown, loan balances are correlated with income. Broadly speaking, before surgeons, lawyers and executives embark on their lucrative careers, they often amass large debts from advanced-degree programs. But just looking at balances understates the degree to which the benefits of student-debt forgiveness would pool at the top of the income distribution, the researchers say. Focusing on the balance of a loan ignores its present value—the total value today of all future payments on the loan, factoring in the rate of return that money would earn on a risk-free investment.

That gets to the second reason: The researchers find that because borrowers further down the income distribution are less likely to repay their loan in full, the ratio of a debt’s present value to its balance increases with income. For those in the bottom income decile, the present value of student debt is about 40 percent of the balance, whereas present value and debt balance are almost equivalent for those in the top decile.

“Once you factor that in,” Yannelis says, “universal student-loan forgiveness policies are actually much more regressive than if we simply look at balances, because the ratio of present values to balances is much lower at the bottom of the income distribution relative to the top.”

Catherine and Yannelis find that targeted forgiveness policies known as income-driven repayment programs are much more effective at concentrating debt relief toward the bottom and middle of the income distribution. IDRs, as the name suggests, tie monthly loan payments to borrowers’ income: under typical terms, an IDR participant might pay 10 percent of whatever income she has that falls above 150 percent of the poverty line. After a certain number of years—20 or 25, depending on the plan—her remaining balance is forgiven.

Enrolling all borrowers in an IDR program would result in the bottom earnings decile receiving four times as much forgiveness (in terms of dollars forgiven) as those in the top decile, the researchers calculate, with 69 percent of benefits going to borrowers in the third through seventh deciles. Increasing the threshold below which individuals don’t pay any of their income to 300 percent of the poverty line, up from 150 percent, would produce similar distributional results, but with more relief going to middle-income borrowers.

The analysis also suggests that IDR-based forgiveness would have a smaller fiscal impact than universal or capped forgiveness. Enrolling all borrowers in an IDR program with a 300 percent threshold would entail slightly less forgiveness—as measured by present values—than a $10,000-capped policy, and far less than a $50,000-capped plan. But following that same IDR policy, the bottom 60 percent of the income distribution would receive more forgiveness than with a $10,000-capped policy, and the bottom 30 percent would see more forgiveness than with a $50,000-capped policy.

Calls for debt relief are likely to continue. But Yannelis says that the policy discussion about student-debt forgiveness often misses the “simple point that we’re not really forgiving debt. We’re simply transferring debt from student borrowers to taxpayers, which makes it important to think about the distributional effects of this transfer.”