Student loan forgiveness is regressive, whether measured by income, education, or wealth

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Some advocates have called for student loan forgiveness because student loans contribute to racial and socioeconomic wealth gaps. The usual measures of financial wealth, however, are a misleading indicator of the economic status of student borrowers. Medical school graduates typically owe six-figure student loans, but that doesn’t mean they’re poorer than high school graduates who didn’t go to college. Wealth, properly measured, should include the value of educational investments that students have borrowed to make. Measured appropriately, student debt is concentrated among very wealthy households, and loan forgiveness is regressive whether measured by income, education, or wealth. Generalized forgiveness is therefore a costly and ineffective means of reducing economic gaps according to race or socio-economic status. Only targeted policies can address the inequities caused by federal student loan programs.

  • The persistence of the Black-White wealth gap is disturbing and worth addressing. Blanket student debt cancellation is not a good way to solve this problem. There are better, more effective, and more progressive ways to narrow racial wealth gaps.
  • Whether measured by income or wealth, student borrowers are better off than other Americans, and widespread loan forgiveness is regressive. Some argue that loan forgiveness is not regressive when measured by financial wealth. But that’s because these measures exclude the very asset the person borrowed to buy – an education that increases lifetime earnings. It’s like estimating a homeowner’s wealth by counting their mortgage balance, but not the value of their home.
  • For many borrowers, the amount they have to repay on their student loans is far less than the amount they borrowed due to existing income-tested repayment plans and rebate programs. We can and must make these programs work better.
  • Taking into account both human capital and the effect of subsidies in student loan schemes, almost a third of student debt is owed by the richest 20% of households and only 8% by the 20 % the poorest. Overall, student loan forgiveness is regressive, measured by income, family wealth, education, and also wealth.
  • Racial gaps in lifetime wealth are even larger when measured by including the market value of educational attainment. But the main causes of this gap, when it comes to post-secondary education, are that black Americans much less like having the opportunity to go to college in the first place, to attend a high-quality, low-cost university. , complete a degree, and pursue higher or professional education than their white peers. And black graduates are less rewarded in the job market for the degrees they earn. Partly because of all of this, black borrowers are finding it harder to repay their student loans. But the contribution of student loans to wealth and income gaps is small, and the effects of loan forgiveness policies on economic gaps are surprisingly unclear.
  • The best way to use federal postsecondary education systems to close racial and socioeconomic gaps in income and wealth is through means-tested grants and loans that promote access and completion in high quality educational institutions; rigorous monitoring of institutions participating in federal programs; well-designed, well-administered, graduated, income-tested repayment plans that isolate borrowers whose education is not paying off, and targeted relief to borrowers who can clearly demonstrate that their loans impose significant economic hardship.
  • Lawmakers should first decide how much taxpayers should pay for prospective students’ tuition and living expenses — a process that, in the name of fairness and efficiency, would no doubt choose to treat students differently. undergraduate, graduate, and professional degree students, basing aid on need and capping grants for high-cost programs — and using that as a model for providing retroactive relief to existing borrowers who missed those benefits while asking others to repay their loans.

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