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In 2008, subprime mortgages toppled the housing market to disastrous effect, setting off our country’s years-long Great Recession. In 2021, many economists are worried the nation’s burgeoning ledger of student loan debt—totaling $1.7 trillion at the end of last year—is the next bubble waiting to burst.

It’s just one of the urgent matters the Biden administration has fielded during the new president’s first months in office. On the campaign trail, then-candidate Biden proposed $10,000 in student loan forgiveness for all borrowers. Since his inauguration, members of Congress have called for more robust forgiveness plans, including up to $50,000 in debt cancellation put forth by senators Elizabeth Warren and Chuck Schumer, and 100% debt cancellation proposed by Senator Bernie Sanders.

But the question has lingered: What is the most fair, equitable and affordable for all Americans? In a new report, the JPMorgan Chase Institute took a look at several possible forgiveness plans and who they really benefit. Here’s what it found:

Universal debt forgiveness is not equitable

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The increased popularity of for-profit colleges means students are borrowing to attend institutions with “lower returns on degrees,” according to a 2020 study by the Federal Reserve. “Nearly one-fourth of borrowers under age 40 who attended private for-profit institutions were behind on student loan payments versus 9% who attended public institutions and 7% who attended private not-for-profit institutions,” according to the Federal Reserve.

Universal student debt cancellation disproportionately benefits middle- and high-income families. This is because high-earning households typically hold more debt, from more schooling and more degrees.

Income-targeting plans can rebalance that

In 2016, the Washington Center for Equitable Growth found that delinquencies are concentrated in Black and Latino communities. Black bachelor's degree recipients default on loans at five times the rate of their white counterparts, according to Columbia University research.
In 2016, the Washington Center for Equitable Growth found that delinquencies are concentrated in Black and Latino communities. Black bachelor’s degree recipients default on loans at five times the rate of their white counterparts, according to Columbia University research.

That can be rebalanced with “aggressive” income-targeting plans. Examples include a fixed debt cancellation of $25,000 for people earning less than $75,000, with cancellation phasing out for people earning $100,000 or more. (The Department of Education, however, cannot access income details for many borrowers, so an income-targeting plan could require a law allowing the Internal Revenue Service to share data.)

Debt forgiveness costs the same as an income-based plan

High monthly student loan payments take precedence over other household spending like rent and utilities, according to the Federal Reserve. Student loan debt hinders home ownership and impacts the decision to have a family, according to the U.K.'s Centre for Global Higher Education.
High monthly student loan payments take precedence over other household spending like rent and utilities, according to the Federal Reserve. Student loan debt hinders home ownership and impacts the decision to have a family, according to the U.K.’s Centre for Global Higher Education.

A universal debt cancellation of $10,000 costs roughly the same as a $25,000 phased-income plan. The universal plan erases 27% ($422 billion) from the national student debt, while the phased-income plan wipes out 28% ($446 billion).

Racial disparities will persist

Más de 40 millones de titulares de préstamos federales deben comenzar a realizar pagos mensuales nuevamente el 1 de octubre, cuando el congelamiento impuesto como parte de las medidas de alivio de Covid-19 concluya.
Más de 40 millones de titulares de préstamos federales deben comenzar a realizar pagos mensuales nuevamente el 1 de octubre, cuando el congelamiento impuesto como parte de las medidas de alivio de Covid-19 concluya.

These plans won’t change racial disparities. While many see debt forgiveness as a way to close the race-wealth gap, both universal and income-targeted plans reduce the same proportion of debt across white, Black, and Hispanic groups, according to the report.

Debt forgiveness could change behavior

There’s a “moral hazard” risk. According to the report, “If people believe debt could be forgiven in the future, they may change their behavior today, taking out more debt or repaying current debt more slowly. . . . However, a one-time cancellation based on already filed tax documents could lessen these problems, insofar as the government can convince the public the cancellation is a one-time action.”

Debt forgiveness is a short-term solution

It’s a treatment, not a cure. Today’s stock of student debt has grown along with greater tuition fees and more enrollment among low-income families. If such underlying forces are ignored, tomorrow’s students will have no choice but to take on more debt.

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