OAccording to a recent study by the Federal Reserve Bank of New York, large-scale student loan forgiveness would primarily benefit young Americans living in high-income areas. But adding an income cap to any rebate policy would help target a greater share of the benefits to borrowers in low-income areas.
The Fed study comes two years after a pointless forbearance period that the Department of Education recently extended. Now, most federal borrowers won’t be required to make payments until September at the earliest.
Supporters of student loan forgiveness have seized on the latest payment pause extension as a chance to double down on calls for sweeping loan forgiveness, saying the Biden administration should wipe out millions in debt before reactivating payments.
President Biden, who has said he supports canceling $10,000 of student debt through legislation, has not come out in favor of using executive power to cancel large amounts of debt. But his officials aren’t stopping the idea completely. Earlier this month, White House press secretary Jen Psaki said in an interview with the liberal podcast Pod Save America that using executive action to write off a loan debt student was “still on the table”.
To measure who would benefit if the pardon became a reality, the Fed authors looked at two popular proposals – cancel $10,000 and cancel $50,000. Under a $50,000 forgiveness policy, 29.9 million borrowers would see their total balance wiped out, and it would cost $904 billion. Meanwhile, a $10,000 forgiveness per borrower would cost $321 billion and wipe out the entire balance for 11.8 million borrowers, the study found.
In either model, implementing an income cap of $75,000 would not only reduce the cost of forgiveness by almost 45%, but would also target the forgiveness more directly to borrowers facing greater repayment difficulties.
This isn’t the first analysis of who would benefit the most from student loan forgiveness. ButThe Fed says its new study is different because it merges data from anonymized credit reports, which give more accurate information about who has student loans and how much they owe.
How student loan forgiveness would affect people at different income levels
The Fed study found that under the two cancellation policies with no income cap, borrowers residing in high-income neighborhoods would receive about 30% of the debt cancellation. Those in low-income areas would get around 25%. High-income neighborhoods were defined as those where the median annual income was $78,303 or more, while low-income neighborhoods were those where the median annual income was less than $46,310.
The Fed found that under the $50,000 forgiveness policy, the average federal student borrower living in a high-income neighborhood would receive $25,054 in loan forgiveness, while the average borrower living in a low income would receive $22,512. This suggests that a larger rebate amount would benefit high-income earners.
Introducing an income eligibility cap of $75,000—in other words, granting loan forgiveness only to borrowers earning less than that—would shift the share of forgiven dollars out of neighborhoods to higher income. Under the $50,000 discount model with an income cap of $75,000, borrowers in high-income areas would receive about 18% of the benefit, up from about 30% previously. Borrowers in low-income neighborhoods would see their share of loan forgiveness rise from around 25% to 34%. The results are similar under the $10,000 rebate policy: an income cap would increase the benefit share for people in low-income areas by about 25% to 35%.
Young people would benefit most from student loan forgiveness
Under each of the four policies examined, more than 60% of loan dollars canceled would benefit borrowers under 40. People aged 60 and over would receive about 6% of loan dollars forgiven in each of the four proposals.
Most student borrowers (67%) are under 40 years old. But younger borrowers also tend to have smaller balances, likely because larger balances come from borrowing for higher education and graduate students are older, on average.
Borrowers with lower credit scores would benefit the most from the discount
As a group, student borrowers tend to have lower credit scores than the general population. According to the Fed’s study, about 34% of all credit scores are above 760, which it considers a super premium. However, only 11% of student borrowers have credit scores above 760. Credit Score vary across generations, with older Americans generally scoring higher. This may explain why borrowers, who tend to be younger, have lower credit scores than the general population.
As a result, forgiveness tends to help people with relatively low credit scores. Under all four proposals, more than half of the canceled debt would go to borrowers with credit scores below 660. This means that most of the canceled debt would go to borrowers with credit scores below 660. mean. (The average national credit score is 690, according to the Equifax credit bureau.)
Restricting the forgiveness based on a borrower’s income would benefit those with lower credit scores the most: under the two loan forgiveness amounts with an income cap of $75,000, the portion of the benefits that accrues to borrowers with a credit score below 620 is around 42%. Without the income cap, these borrowers only receive about 37% of the forgiven dollars.
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