Both Democrats and Republicans are wrong about student debt cancellation

Reports are swirling that the White House is only weeks away from rolling out a plan to cancel some of the $1.6 trillion in student loan debt currently held by tens of millions of Americans across the country.

Although President Biden has been vague about his commitment to use executive action to reduce federal student loan debt, the White House has said that the total debt forgiven for each borrower will be less than the $50,000 requested by Sens. Elizabeth Warren (D-Mass.) and Chuck Schumer (D-N.Y.). The Biden administration has also said there will be income limits on the program, capping eligibility at $150,000 or less in household income.

Since news broke about the possibility of a soon-to-be-released debt cancellation plan, congressional Republicans and pundits on the right have gone on the war path, calling any student loan forgiveness “outrageous” and “immoral.”

Rep. Jason Smith (R-Mo.), ranking Republican on the House Budget Committee, called student debt forgiveness a “bailout” for those with “graduate degrees, six-figure incomes, and high lifetime earnings” — a standard talking point among Republican politicians and some conservative pundits.

The left wing of the Democratic Party has taken the opposite approach, reiterating that $50,000 ought to be the minimum amount of student debt forgiven, because tens of millions of families are being crushed by student loan debt. Some, such as Sen. Bernie Sanders (I-Vt.), have gone further, reiterating their calls for total debt forgiveness.

Meanwhile, the establishment wing of the Democratic Party, one of the few ideological groups where support for the president remains high, is claiming that if Biden were to forgive student loan debt, it would have a far-reaching, positive impact on the economy, helping millions of people currently burdened by the debt.

The truth is, however, none of these groups have the story quite right.

Republicans and conservatives are correct that forgiving student loan debt would be unfair to the millions of people who have already paid off most or all their debt. But the characterization that Biden’s plan to cancel around $10,000 would primarily benefit young professionals earning six figures is very misleading.

Most student loan debt is held by higher-income earners. According to a widely cited 2020 report by the Brookings Institution, “The highest-income 40 percent of households (those with incomes above $74,000) owe almost 60 percent of the outstanding education debt and make almost three-quarters of the payments.”

But millions of those higher-earning households have large debt loads and are already enrolled in a federal income-based repayment plan, which limits monthly payment amounts largely based on a borrower’s household income. More than 8 million borrowers are enrolled in an income-based or income-contingent repayment plan. And many of them have very high debt loads, earn above-average incomes and have a costly four-year or graduate degree.

For many of these borrowers, forgiving $10,000 in student loan debt would have little immediate financial impact, because $10,000 would not be nearly enough to pay off their large student debt balance and because their monthly payment is tied to income, not debt owed. It might help them pay off their student debt a little faster over the long run, but probably not quickly enough to qualify as substantial aid. In many cases, the interest accrued on the debt would increase the total debt owed by more than $10,000 over the next several years anyway.

Who then would be helped significantly by the student debt forgiveness proposal? At first glance, the group that appears most likely to receive the biggest aid is those with small debt loads. About 15 million borrowers owe less than $10,000, so a loan forgiveness policy that “cancels” $10,000 in debt would wipe away all of their existing federal student loan debts and monthly payments.

However, contrary to the standard talking points of the Democratic Party, most of these individuals don’t need student debt forgiveness. Americans with average and higher incomes can afford to make the small payments required when owing less than $10,000. For example, a borrower with a household income of $50,000 and a total student debt of $8,000 is required to pay only $87 per month, less than most cable bills.

A lower-income individual earning $20,000 per year with $8,000 in student loan debt would qualify for an income-based repayment plan that would lower the monthly bill to just $16, an amount so low that anyone with a job should be able to afford the payment.

Even more importantly, federal law already provides for automatic debt cancellation after 20 or 25 years, depending on whether the debt was for undergraduate or graduate studies. A person earning $20,000 per year with $8,000 in debt while enrolled in an income-based repayment plan would not pay enough each month to offset the interest amassed. In 20 years, he or she will have paid off only about $3,100 in student loan debt and will have more than $13,900 in loan debt forgiven, nearly $4,000 more than the $10,000 figure floated by President Biden while he was on the campaign trail.

That’s not to say there aren’t borrowers who would be greatly helped by a loan forgiveness of roughly $10,000. Some middle-income and higher-income earners with moderate amounts of debt, say $30,000, would be able to pay off their debts more quickly, although their monthly payment amounts might not change at all, depending on the payment plan they are enrolled in.

All things considered, though, Biden’s plan would substantially and immediately help a relatively small group of borrowers, most of whom would not be high-earning professionals with expensive graduate degrees (as many Republicans claim) or lower-income working families (as numerous Democrats have suggested).

It’s also important to remember that Biden’s proposal would do nothing to solve the problem of skyrocketing tuition and other costs associated with attending a higher-education institution. If anything, it will encourage young people to take out even more student loan debt than they already are, because the expectation could be that some or all that debt would be cancelled by the federal government.

Justin Haskins (Jhaskins@heartland.org) is the director of the Socialism Research Center at The Heartland Institute and a New York Times bestselling author.