The federal government should target any debt relief on those who really need it.
It’s important to remember that student loan borrowers are different from most Americans – they went to college. Students, as a group, earn more, are better educated, live longer, and come from better-off backgrounds than other Americans. These advantages are evident among student loan borrowers.
More than half of student debt – 56 percent – is owed by households with a graduate degree. This is in part because the programs where students get the most debt are mostly professional degree programs like the MBA, Faculty of Law, or medical school. Indeed, a disproportionate amount of student debt is owed by borrowers from a handful of elite colleges with prestigious graduate programs that charge astronomical tuition fees. As a result, approximately 36 percent of all student debt is owed by individuals in the richest 20 percent of income distribution.
And it’s not just that borrowers do well after college; they often grew up in well-off households. There is no income or wealth test for who can get a federal student loan, and affluent students are more likely to go to an expensive university, graduate, and go to college. university. The typical student who grew up in a high-income family should about 27 percent more than the typical student from a low-income family.
In contrast, borrowers struggling with student loans are different. Almost 90 percent of borrowers in default of a student loan received a Pell grant because their income and wealth were low when they applied to college. About 46 percent of defaulting borrowers went to for-profit school, but they only represent 9% of all borrowers. Half of defaulters never graduated, but nationally, only 8% of student debt is owed by households without a degree. Other than having a student loan, the economic situation of struggling borrowers has little in common with their high-income peers.
Helping distressed borrowers shouldn’t require providing a boon to high-income, well-educated students from affluent backgrounds. In other contexts – such as when the federal government’s Supplemental Nutrition Assistance Program helps families get food on the table, or laid-off workers pay their bills with UI, or families off the hook. workers are supported by the labor income tax credit – student loan assistance is targeted to the poorest households. This is especially important for student loan relief because the dollar amounts are so important: the complete cancellation of student debt would cost more than the cumulative amount spent on each of these programs over the past 20 years.
Targeting the loan forgiveness to those in need is not complicated. There are income-based repayment plans that limit student loan repayments to 10 percent of a student’s discretionary income (income minus 150 percent of the poverty line) and write off undergraduate debt after 20 years. This program ensures that high-income borrowers contribute to the cost of their post-secondary education, but relieves those who are less fortunate. Too few students enroll in the program due to administrative hurdles, but these issues should be addressed so that current and future borrowers benefit.
More immediate relief could be offered to borrowers who fail to repay their loans through income-tested plans. Each student loan borrower has completed a financial aid application documenting their income and wealth so the government will know if the loan funded a well-paid professional degree. For students enrolled in income-based repayment plans, the government knows their financial situation after college. Information about a student’s income, economic status, and educational attainment could be used to focus relief on the groups of borrowers who need it most, in the same way that a judge might pay bills. onerous debts in bankruptcy court.
Deciding which students deserve federal government support and which do not is an unpleasant task that policymakers might delay with a one-size-fits-all approach to forgiveness, but it is a task they cannot postpone indefinitely. Every year the federal government is providing $ 100 billion in new loans, knowing that millions of new borrowers will struggle in the future, making the situation worse. To solve this problem, Congress must decide which students, institutions and study programs taxpayers should pay for and which should belong to future students. They should do the same for existing borrowers.
Adam Looney is Professor in the Department of Finance and Executive Director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis, University of Utah.