Cancelling $50,000 in federally-backed student loan debt for American borrowers would actually help lower-income debtors far more than rich ones, according to a new research brief.
The study by the Roosevelt Institute, a left-leaning think tank based in New York City, came to the conclusion as other academics argue that eliminating debt for millions of borrowers would instead disproportionately benefit high-income borrowers.
"We made a policy mistake, in terms of placing the funding of higher education on families," Laura Hamilton, one of the co-authors, told Yahoo Finance. "And it created a lot of inequities, big surprise. ... We've created this massive generational problem... and we need to fix that."
The Roosevelt Institute researchers estimated that cancelling $50,000 in federally-backed student debt would provide an average of $562 in benefits for the top 10% of American households while households in the bottom 10% of net worth would see an average of $14,991 in benefits.
"Contrary to common misperceptions, careful analysis of household wealth data shows that student debt cancellation... would provide more benefits to those with fewer economic resources and could play a critical role in addressing the racial wealth gap and building the Black middle class," the brief stated.
The primary reason for the massive gap in average benefit, according to the study, is that lower-income borrowers — and particularly Black borrowers — tend to take on more debt to fund their higher education. (Black borrowers are also more likely to attend a predatory for-profit school, are less likely to graduate, and are more likely to default on their debt.)
And though higher-income households generally hold more outstanding student debt, the researchers noted that the burden of debt is more pronounced for lower-income households since "each dollar of debt is actually a more substantial barrier to economic security, access to consumer credit, and increases in net worth.”
Regressive vs. progressive
The motivation to publish the brief was sparked by studies, including a 2020 paper, that argue full or partial forgiveness is regressive since it would benefit high earners more than lower-income borrowers.
That sentiment reached the White House, with President Joe Biden stating in February that he wouldn't cancel $50,000 in debt because he didn't want to erase loans for Ivy League graduates.
"The frustration was sort of coming out of the media narrative that had coalesced, a mesh of what we call the myth of student loan cancellation regressivity," Hamilton said. "The data were being used in ways that we thought was problematic."