Another study from the Brookings Institution overturns assumptions about financial aid, this time in the area of student debt forgiveness.
The too-long version didn’t read: Even though Pell grant recipients, who represent students from the lower economic strata, may qualify for $20,000 student loan forgiveness, the federal government won’t spend more on a basic person that the relief that everyone, who qualified for up to $10,000, gets.
Adam Looney, nonresident senior fellow at Brookings and executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis at the University of Utah, exposes diabolical details.
The confusion comes from the way the program is framed. Anyone with student debt who earns less than $125,000 per year ($250,000 total for married couples) in 2020 or 2021 can get up to $10,000 in loans discharged. People from more economically disadvantaged backgrounds — identified as having been a Pell Grant recipient at least once — are eligible for loan forgiveness of up to $20,000.
The reason for economic targeting for a greater potential discount is that the administration wants to help racial disparities in charges as well as those who could not afford to continue going to school and therefore never obtained a diploma and the 16% of those who dropped out (a third of them are elderly, for those who think the bad guy is the attitude of capricious young people).
All is well on the surface, but assumptions do not define reality. The details do, and according to Looney’s analysis, the details of this reality are startling.
It used data from the Postsecondary Education Entry Survey, which was conducted with a representative set of students in 2004 and then followed them over the next 12 years. Not as good as the detailed current data, but “probably the best available survey of student borrowers relevant to understanding recent debt relief policy,” as he wrote.
“In total, the policy frees up about $500 billion of debt,” Looney said. “Of this amount, 72% (or $360 billion) was owed by Pell grant recipients. While Pell Grant recipients could have gotten up to $20,000 in aid, the actual average amount of aid they got was around $13,300 because many of them owe less. than $20,000 (and much less than $10,000).
Then comes another complication. The $360 billion does not cost the government that much. A third of students fail to repay loans within 12 years of enrolling in school and they account for 90% of all loan defaults.
It then points to a 2021 analysis by Sylvain Catherine and Constantine Yannelis on how full loan forgiveness would be distributed. “Full or partial forgiveness is regressive because high incomes have taken out larger loans, but also because, for low incomes, balances greatly overestimate current values,” the two wrote. “Therefore, forgiveness would benefit the top decile as much as the bottom three deciles combined. Blacks and Hispanics would also benefit much less than the sales suggest.
There are already income-based repayment plans and other policies that cancel loans after a significant number of years of repayment. The result, according to Looney, is that the lowest-paying 40% of borrowers, in present net worth (because future dollars are worth less than current dollars), would pay only 45 cents of every dollar owed.
Looney goes on to say that borrowers who haven’t received Pell grants have lower default rates and tend to pay more because they have unsubsidized undergraduate loans that have higher interest rates. “For these reasons, the cost of canceling $140 billion of their loans is probably much closer to $140 billion. Per borrower, that means the cost of helping $10,000 to the $16 million ‘borrowers in this group was about $8,750,” he wrote. This compares to the average of $9,260 per Pell beneficiary.
His most important point was that those who received Pell Grants were not just overrepresented among borrowers in default, but among all dropouts (79%).
“If the goal was to help these specific groups, why not spend all the money on them, rather than spending the same amount on non-Pell borrowers as Pell recipients?” Looney wrote. A good question.
This corresponds to a larger model. Rich kids are eight times more likely to graduate from college than poor kids, a 2015 study showed. Only 9% of U.S. kids whose families are in the bottom income quartile (less than $34,160 in annual income) earn a bachelor’s degree by age 24, compared to 77% of those in the top quartile ($108,650 or more). Even middle class ($63,600 to $108,650) and lower middle class ($34,160 to $63,600) children are much less likely to graduate. Here’s the story in a graph from Pell.
College costs are probably a big factor. In constant 2012 dollars, the maximum Pell Grant amount in 2012 was only 95% of what it was in 1975, although university fees were 2.3 times higher. In 1975, a maximum Pell grant could cover 67% of the average cost of college. In 2012, it was 27%.
As the Notes from the Pell Institute“If the Pell Grant were to be reinstated to cover two-thirds of average college costs in 2020-21, it should be increased to $17,126 from $6,345.”
The company says it wants to help disadvantaged people. But politicians and the people who vote for them seem just as happy with the image of doing something as taking meaningful action.