Refuting the worst excuses against student debt cancellation

On June 1, the White House released a new statement outlining a plan to “build Black wealth and narrow the racial wealth gap.” Largely a rework of campaign pledges and prior executive actions, the plan announced a new interagency effort to address inequity in home appraisals, a commitment to increase federal contracting with small disadvantaged businesses, a $10 billion fund to support community-led civic infrastructure projects, and other initiatives to target a wealth gap that sees the average white family having roughly 10 times the amount of wealth as the average Black family. 

Conspicuously absent was President Joe Biden’s pledge to use his executive authority to cancel $10,000 of student debt for all borrowers as well as all undergraduate debt for graduates of public schools and historically Black colleges and universities who make less than $125,000 per year. These absences did not go unnoticed. “While many components of President Biden’s budget appear to be encouraging, when it comes to addressing America’s racial wealth gap, it fails to address a key issue at the core of the racial wealth gap, the student loan debt crisis,” said NAACP President Derrick Johnson.

Johnson is right. Our research shows that student debt cancellation can narrow the racial wealth gap among low-wealth borrowers. Because Black people and Black-majority neighborhoods hold more student debt than their white peers, cancelling debt can help close the wealth divide.

But we suspect that instead of pursuing student debt cancellation, the Biden administration is listening to wrongheaded arguments that shape a racially biased narrative around student debt.

For instance, in Forbes, Marguerite Roza argued that we should cancel student debt in exchange for delayed social security benefits. “Why the trade?” Roza asked. “First and foremost, it solves the cost problem.”

But the “cost problem” of student debt comes not from broad cancellation but from non repayment. Before the payment moratorium imposed when the COVID-19 pandemic struck, only 56 percent of student loans were being repaid. The Congressional Budget Office (CBO) estimates that nearly half of these loans are in some type of income-based repayment. Under these repayment schemes, instead of paying down the debt, the borrower pays a percentage of their discretionary income for 20 to 25 years, after which, their debt will allegedly be cancelled. However, after the failures of the Public Service Loan Forgiveness (PSLF) program — which has rejected 99 percent of applicants — it is difficult to trust the Department of Education to fulfill their guarantees. 

The Government Accountability Office has criticized the Department of Education for failing to accurately measure the expected repayment with households using income-based repayment. Much student debt will be cancelled eventually, either by PSLF, income-driven loan repayment, or death. Cancelling student debt now, instead of later, would not “cost” the government anything, as the money has already been spent, the costs of collection are high, and repayment is low.

Another take on student debt cancellation, from researchers Sylvain Catherine and Constantine Yannelis, argues that because poor people’s debts are going to be cancelled eventually, there’s no reason to cancel it now. But cancelling student debt now allows borrowers to start their families, purchase homes, or open businesses — all key parts of Biden’s plan to narrow the racial wealth gap. In a follow-up piece, Catherine and Yannelis argue that wealth is the wrong metric to judge inequality, because the lifetime earnings of households with a college degree dwarf their wealth. While Catherine acknowledges that it would be better to look at households over time to see how student debt affects their wealth and earnings, the researchers fail to cite the St. Louis Fed study that does just that and finds, “White college-educated households are significantly more likely to receive financial transfers from their parents, whereas Black college-educated households are significantly more likely to provide financial support to their parents.” Thus, for white households with a college degree, their increased wages comes with intergenerational wealth transfers in; for Black households with a college degree, their increased wages come with an intergenerational wealth transfer out.

Others argue cancellation would not really benefit low-income families. “If you forgive that debt, they don’t have any more money in their pocket,” economist Adam Looney told Vox. This is not what the literature says about the macroeconomic impacts of student debt cancellation. For example, homebuying has been a key part of recovery from recessions over the past decade, but households with student debt have largely been kept from full home ownership participation. These recessions harm the ability of debtors to pay back their student loans, particularly for households who live in areas hit hardest; for the COVID-19 recession, those were Black households. But more important than the scholarship showing the macroeconomic benefits of student debt cancellation, the borrowers themselves will tell you how their student debt stops them from saving for emergencies or down payments.

Another bad take on student debt cancellation is that because not as many Black people go to college, debt cancellation isn’t needed. “So if you were to forgive all student debt now, it’s absolutely regressive,” said Sandy Baum on The New York Times’ podcast The Argument. “When people talk about the racial wealth gap, about half of Black adults have never been to college. They don’t have any student debt.”

To be clear, college enrollment rates for Black 18- to 24-year-olds are not significantly different from white 18- to 24-year-olds. And even if it were the case that half of Black adults have never been to college, to say that something is “regressive” because some Black people won’t benefit would be like saying that sales taxes are progressive because wealthy households purchase more goods and services.

These arguments ignore how the United States has created structures to help wealthy families go to college. Families with intergenerational wealth (disproportionately white) can use tax advantaged Coverdell education savings accounts or 529 plans to pay for their education, while low-wealth, disproportionately Black families are pushed into taking on loans.

We’re not sure who is feeding Biden information about student debt cancellation, but it’s clearly leading to inaction. For the sake of equity and ameliorating the racial wealth gap, we hope he listens to reason — and the Black Americans who are saddled with student debt.

Andre Perry is a senior fellow and Carl Romer is a research assistant at the Brookings Metropolitan Policy Program. Follow them on Twitter: @andreperryedu, @_cromer043