Is Less More? The Impact of Limited Student Debt Cancellation

As student loan debt soars past $1.5 trillion in the United States, Democratic presidential candidates have brought the issue to the forefront of American political discourse and have proposed plans to cut or completely eliminate student loan debt.

The view that the student loan crisis will require dramatic legislative action is supported by figures showing that the crisis has worsened, with no signs of resolving itself without Congressional intervention.

Between January 1989 and January 2016, the cost to attend college increased nearly eight times faster than real wages. In 2016, the average price of a four-year degree was $104,480. The cost for the same four-year degree in 1989 was $26,902, or $52,892 after adjusting for inflation.

As college becomes less and less affordable, more graduates are struggling under the financial burden of their loans. For years after graduation, these loans limit their opportunities to buy houses and start families, increase stress and anxiety, and otherwise stunt the trajectory of their lives.

Of the 45 million federal student loan borrowers, nearly 1 in 4 are in default or struggling to stay current on their loans. The consequences of falling behind on payments can include negative credit reports, wage garnishment, and diminished options to cure defaulted loans.

Struggling with student loan debt, which surpasses all types of household debt (other than mortgages) in the United States, can damage consumer credit reports, which are essential for gaining employment, housing, and access to credit. The pursuit of a college education, often seen by many as a path toward prosperity, has in fact led many to economic insecurity.

Up to now, proposals have focused on near-universal debt forgiveness, but new data from the Center for Responsible Lending (CRL) suggests even limited debt cancelation programs would provide enormous relief for American families — particularly people of color.

CRL is a nonprofit, nonpartisan organization that describes its mission as working to fight predatory lending practices. Their June 2019 report suggests that cancelling just $10,000 of every federal student loan borrower’s debt would wipe out federal student loans for nearly 40% of borrowers who aren’t in a grace period or in school.

CRL’s analysis goes on to suggest that the $10,000 benefit would completely cancel federal student loan debt for 61% of the more than 7 million borrowers who are in default on their loans.

The report also states that even borrowers with some debt remaining would benefit significantly. Borrowers in repayment with debt levels in the third quintile would see their balances drop by 80%. Borrowers in the fourth quintile would have 42% of their debt cancelled, and borrowers with the highest debt levels would see 17% wiped away.

This analysis follows a 2018 study from the Levy Economics Institute of Bard College that found cancelling all outstanding student debt would boost gross domestic product by between $86 billion and $108 billion per year, on average, for the 10 years following the debt cancellation.

So far, Sens. Bernie Sanders, Elizabeth Warren, Kirsten Gillibrand, and Cory Booker have laid out the most detailed plans for addressing the crisis.

Sanders’ plan includes lowering interest rates on student loans and partnering with states to eliminate tuition at public colleges, universities, and trade schools for households making under $125,000 per year.

Under Warren’s proposal, borrowers with a household income of up to $100,000 per year would have up to $50,000 in debt cancelled. Borrowers with an annual household income between $100,000 and $250,000 would have some debt cancelled, but not the full $50,000. Borrowers in households earning $250,000 or more per year wouldn’t have any of their student loans cancelled. In addition, Warren introduced a bill to cancel student debt titled the Student Loan Debt Relief Act of 2019.

Gillibrand and Booker have both vowed to make community college tuition-free, expand the Public Service Loan Forgiveness Program, and refinance student loans at lower interest rates. Booker also plans to forgive student loan debt for teachers.

While the debate surrounding student debt relief continues, it has become clear that the financial future of millions of current, former, and future college students depends on lawmakers reforming the current system.