Student Loan Cancellation: Why Less Student Loan Forgiveness Is Better

According to new research, less student loan forgiveness would provide a greater share of benefits to student loan borrowers who are struggling the most.

Here’s what you need to know — and what it means for your student loans.

Student Loans

For anyone hoping for wide-scale student loan cancellation, new research from the New York Fed offers some surprising findings that may not sit well with student loan borrowers. Here’s what is inside this new report.

Student loan forgiveness: surprising conclusions

According to the report:

• a smaller amount of student loan forgiveness such as $10,000 is superior to a larger amount of student loan forgiveness such as $50,000;
• smaller student loan forgiveness would distribute a greater share of benefits to low income and middle-income earners;
• higher student loan cancellation benefits student loan borrowers with higher income and higher credit scores;
• less student loan forgiveness distributes a greater share of benefits to majority minority neighborhoods;
• adding an income cap to student loan forgiveness proposals substantially reduces the cost of student loan forgiveness; and
• an income cap increases the share of benefit going to student loan borrowers who are more likely to struggle with student loan repayment.

(Student loan forgiveness: 5 key takeaways from major announcement)

Student loan cancellation: how much it costs

The researchers compared the relevative costs of $50,000 of student loan cancellation to $10,000 of student loan cancellation:

$50,000 of student loan cancellation

• Total cost: $904 billion
• Student loan forgiveness: would forgive all federal student loans for 29.9 million student loan borrowers (79% of all federal student loan borrowers)
• Average student loan forgiveness: $23,856 per student loan borrower
• Student loan default: would forgive 77% of all federal student loans were in student loan delinquency or student loan default prior to the Covid-19 pandemic
• Income limit: an income limit of $75,000 would reduce the total cost from $904 billion to $507 billion, which is a 44% decrease.

$10,000 of student loan cancellation

• Total cost: $321 billion
• Student loan forgiveness: would forgive all federal student loans for 11.8 million student loan borrowers (31% of all federal student loan borrowers)
• Average student loan forgiveness: $8,478 per student loan borrower
• Student loan default: would forgive 31% of all federal student loans were in student loan delinquency or student loan default prior to the Covid-19 pandemic
• Income limit: an income limit of $75,000 would reduce the total cost from $321 billion to $182 billion, which is a 43% decrease.

Who benefits from student loan forgiveness

• student loan forgiveness predominantly benefits student loan borrowers under age 40, who comprise 67% of all borrowers;
• however, only 57% of student loan balances are owed by student loan borrowers under age 40 (the other half are older borrowers with graduate school student loans); and
• student loan borrowers over age 60 benefit the least from student loan forgiveness.

Student loan forgiveness: income caps and student loan relief

According to the report:

• adding income caps to student loan forgiveness would help low income student loan borrowers (annual income less than $46,000) more than wide-scale student loan cancellation;
• if there is no income cap, higher income neighborhoods (annual income more than $78,000) would receive 30% of student debt forgiveness, while lower income neighborhoods only receive 25% of student loan cancellation;
• without an income cap, low-income stdent loan borrowers, on average, would get $22,512 of student loan forgiveness compared to $25,054 of student loan forgiveness for student loan borrowers in high-income neighborhoods;
• with a $75,000 income cap, student loan borrowers in low-income neighborhoods would get 34% of the share of student loan forgiveness (compared to only 25% without an income cap).

In contrast, Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have proposed student loan forgiveness with an income cap of $125,000.

(Student loan relief: how to qualify for a fresh start on your student loans)

Student loans: next steps

Biden is considering wide-scale student loan forgiveness through an executive action potentially before the midterm election in November. While Biden has called on Congress to cancel $10,000 of student loans, Biden hasn’t indicated who would qualify and whether there would be any income cap. The Biden administration could consider this new research in devising a policy on student loan forgiveness. However, there’s no guarantee that Biden will cancel student loans for all or most student loan borrowers, despite pressure from congressional Democrats. Currently, federal student loans are paused, but student loan relief expires on August 31, 2022. What are your plans for student loan repayment? Make sure you have a financial plan in place. Consider these options:

• Student loan refinancing (lower interest rate + lower payment)
• Income-driven repayment (lower payment)
• Student loan forgiveness (federal student loans)

Student Loans: Related Reading

Student loan forgiveness: 5 key takeaways from major announcement

Biden will cancel student loans or extend student loan pause before August 31

Student loan cancellation and the student loan payment pause are confusing. Here’s what to know.

Here’s who won’t qualify for $6.2 billion of student loan cancellation