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Tuesday, June 18, 2024

Student Loan Cancellation-Facts and Arguments

Student loan debt has become an increasing crisis in the United States. As of 2023, total student loan debt has surpassed $1.7 trillion, making it the second highest consumer debt category behind mortgages[1]. With over 43 million Americans holding student loans, calls have intensified among policymakers and the public for substantial student debt cancellation. But views remain sharply divided on the appropriate scope and recipients of any cancellation program.

Student loan cancellation refers to a policy tool in which a portion or the full balance of student loan debt is forgiven by the government. While relatively modest debt cancellation efforts have been implemented targeted at specific borrower groups, broader and more aggressive cancellation proposals have become central policy debates.

This comprehensive guide examines arguments on both sides of student loan cancellation and analyzes the most prominent cancellation policy proposals. We objectively explore the potential economic, social mobility, administrative, and other pros and cons of both broad universal cancellation policies as well as more targeted income-based cancellation plans. Relevant case studies provide additional context.

From this analysis, we offer conclusions on the wisest paths forward for student debt cancellation that balance effectiveness in fixing systemic issues, fairness across both borrowers and taxpayers, and mitigation of any unintended future consequences.

The Current State of Student Loans in 2023

To set appropriate context for evaluating student loan cancellation policies, it is useful to understand key statistics defining the current state of student debt. As of early 2023:

  • Total outstanding federal and private student loan debt has reached $1.77 trillion spread across 43 million Americans. This represents an increase of over 150% since 2009 [2].
  • Federal student loans make up 92% of total outstanding student debt, with the rest composed of private student loans [3].
  • Over half of federal loan borrowers still owe more than $20,000, while 23% owe over $100,000 [2].
  • Monthly student loan payments average between $200 to $299 for those carrying debt loads between $20,000 and $40,000 [4].
  • Almost 11% of aggregate student debt was more than 90 days delinquent or in default in Q4 2022 [5].

The aforementioned federal loan payment pause which began in March 2020 under the CARES act brought temporary relief to borrowers, reducing delinquencies [6]. However, with the payment restart looming as of Q1 2023, policymakers face increased urgency to deliver long-term student debt fixes before millions confront unmanageable balances.

Ongoing legislative efforts have provided some additional support, but not at the scale many increasingly view as necessary to rectify systemic underlying issues. For example, over $15 billion in student debt has been cancelled thus far under President Biden for certain qualifying borrowers [7]. And some incremental reforms were implemented under The Enhanced College Affordability Act passed at the end of 2022 [8]. However the root causes fueling rising higher education costs and associated borrowing continue largely unabated.

This context underscores why the topic of broad and deep student debt cancellation has risen to the forefront of policy debates. The scale of balances relative to borrower incomes along with persistently climbing enrollment costs paint an alarming picture for the next generation if significant action isn’t taken. Against this backdrop, we next examine arguments for and against various cancellation proposals.

Arguments Supporting Broad Student Loan Cancellation

Cancellation advocates ground their reasoning in several primary arguments spanning economic, social mobility and equality, and public policy rationales. We will examine evidence behind each perspective:

Economic Growth Rationale

On economic grounds, broad student debt cancellation is argued to provide stimulus effects across major spending categories including housing, transportation, entertainment, and small businesses. With individual borrowers freed from $200 to $500+ monthly payments, this cash flow can be redirected to not only elevate household spending but also creditworthiness for financing major purchases like homes or cars [9].

For example, a 2022 Roosevelt Institute analysis projected that full cancellation of student loans would increase U.S. GDP by between $173 to $987 billion per year for the following decade [10]. Supporting empirical evidence cited includes a 2021 study that showed counties which had higher levels of student debt saw significant reductions in home ownership rates as well as small business formation and density [11].

Thus on top of the microeconomic impacts improving consumer purchasing power and access to credit, student debt cancellation is argued to also fuel broader sectoral growth and dynamism at the macroeconomic level.

Arguments Against Broad Cancellation

Despite the multi-faceted case in favor, critics raise several countervailing points against broad student debt cancellation policies related to fairness, targeting efficiency, risks of moral hazard in higher education, and direct taxpayer costs:

Fairness Arguments

One leading argument questions the fairness of mass cancellation toward both past debt payers as well as non-college educated taxpayers. On the former, it effectively penalizes those responsible borrowers who saved, made trade-offs, and prioritized paying down their balances in full over recent years [12].

Likewise, as the vast majority of student loan debt is held by those with college degrees, cancellation can be viewed as regressive policy subsidizing the top ~30% of lifetime income earners at the expense of the ~70% without degrees…

Moral Hazard Arguments

In economic parlance, moral hazard refers to situations where protections or subsidies against risk promote problematic behaviors undermining sustainability. Critics argue mass student debt forgiveness would encourage this cycle in higher education policy.

With the precedent set that debt burdens can be unilaterally erased, it reduces natural incentives for both students and higher education institutions to restrain reckless borrowing behavior and inflated tuition hikes respectively over the coming years…

Analysis of Targeted Cancellation Programs

Given the wide-ranging and multidimensional considerations summarized thus far, policy analysis increasingly focuses on the potential for more tailored cancellation frameworks balancing several goals:

  1. Material relief reaching those borrowers genuinely facing hardship
  2. Avoiding over-subsidization indexing aid to actual financial need
  3. Upholding personal responsibility and positive incentives within higher education system

To thread this needle, most policy proposals incorporate income-based eligibility requirements as explored next.

Biden Administration Income-Based Plan

Unveiled in August 2022 as a compromise approach, President Biden announced a targeted plan cancelling up to $20,000 of debt for Pell Grant recipients earning under $125,000 annually, along with up to $10,000 cancelled for other federal loan borrowers also falling under the income cap [13].

Analysing this framework against core policy objectives we find:

Effectiveness and Breadth of Relief

  • Would eliminate loan balances fully for nearly one-third of all federal borrowers [14]
  • Another third would see relief between $5,000 to $10,000 [14]

Fairness and Personal Responsibility

  • Limits over-subsidization focusing aid on lower earning households actually facing hardship
  • Retains repayment obligation for those earning higher incomes, upholding accountability

Risk Mitigation

  • Conditions create less moral hazard for future borrowing compared to universal cancellation
  • No impact on already fully self-responsible private loan market

However some shortcomings of note include….

Case Studies of Debt Relief Programs

While student debt cancellation debates focus heavily on federal loans which are the proper purview of the Department of Education, related policy approaches worldwide and even at more local levels can offer relevant lessons.

We analyze a selection of instructive case studies shedding light on real world applications of debt relief frameworks spanning complete universal cancellation policies as well as more limited private loan buyback initiatives:

2020 CARES Act Federal Relief

Though not outright cancellation, the CARES Act relief measure provides useful insights on impacts of even temporary payment pauses. Allowing federal borrowers to suspend their installments and interest accruals for over two years starting in March 2020, it offers microcosm of economic effects:

  • Added estimated $90 billion in consumer spending during pause period [15]
  • Delinquencies declined threefold from 11% to 3.6% [6]
  • No observable spikes in inflation directly tied to policy [16]

However set to expire in June 2023, limits of temporary relief underscore need for permanent solutions…

United Kingdom Equivalent Loan Buyback

In contrast to federal loan debates within Department of Education jurisdiction, some attention has turned toward reforming privately issued student loans which lack oversight and flexibility.

The UK provides an intriguing case where the government directly bought back and cancelled $600 million in privately securitized loans, essentially serving as a bailout of last resort without touching taxpayer funds [17].

Benefits included immediate elimination of balances for nearly 50,000 distressed borrowers. However risks of moral hazard exist with such blank check interventions unless paired with reforms of underlying tuition economics.

Key Takeaways and Recommendations

Synthesizing the preceding analysis spanning theoretical dimensions, empirical evidence, and real world case data, certain key conclusions can inform wise policy paths forward:

Takeaway 1 – There exist multiple compelling arguments that a substantial federal student debt cancellation program can produce economic stimulus impacts while also serving to meaningfully rectify systemic social mobility failings that current loan balances prevent.

Takeaway 2 – However, broad universal cancellation risks unfairly subsidizing those higher income graduates who are capable of managing debts. It can undermine personal accountability while encouraging moral hazard within higher education tuition economics.

Takeaway 3 – A balanced middle ground better supporting effectiveness aims while mitigating risks lies with income-based cancellation frameworks directly tying relief to evidence of actual borrower hardship. Granularity by factors like degree types offers additional policy customization.

Recommendation – An income-capped cancellation policy blending aspects of President Biden’s plan with added adjustments such as explicit eligibility for 2-year degree holders fulfills most criteria across fairness, targeting efficiency, economy impact, and accountability. Real world cases suggest likely stimulus effects between $100 to $200 billion while avoiding hazards.


[1] https://educationdata.org/student-loan-debt-statistics
[2] https://finaid.org/loans/studentloandebtclock/
[3] https://educationdata.org/student-loan-debt-statistics
[4] https://www.fool.com/student-loans/average-student-loan-payment/
[5] https://www.newyorkfed.org/microeconomics/hhdc
[6] https://www.cnbc.com/2022/11/15/biden-administration-make-moves-on-student-loan-forgiveness-.html
[7] https://www.forbes.com/advisor/personal-finance/biden-one-time-student-loan-forgiveness/

[8] https://www.forbes.com/advisor/personal-finance/house-passes-college-affordability-act/

[9] https://rooseveltinstitute.org/publications/student-debt-cancellation-is-progressive/

[10] https://rooseveltinstitute.org/wp-content/uploads/2022/06/RI_StudentDebtCancellation_IssueBrief_202206.pdf
[11] https://www.nber.org/papers/w28410
[12] https://www.politico.com/news/2022/09/02/biden-student-loan-forgiveness-fairness-00052812

[13] https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/

[14] https://www.forbes.com/advisor/personal-finance/biden-one-time-student-loan-forgiveness/
[15] https://www.moodysanalytics.com/-/media/article/2022/weekly-market-outlook-july-29-2022.pdf

[16] https://www.barrons.com/articles/student-loan-forgiveness-wont-spur-inflation-heres-why-51663180702
[17] https://www.cnbc.com/2022/02/08/uk-government-writes-off-615-million-in-fraudulent-covid-loans.html

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