Student Debt Cancellation IS Progressive: Correcting Empirical and Conceptual Errors

Executive Summary

In recent years, student debt cancellation has come to the fore of the national policy agenda, with several proposals currently on the table—including Senator Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer’s (D-NY) plan to cancel up to $50,000 of federal student loans per borrower.¹

Opponents of these proposals have created what we refer to as the “myth of student loan cancellation regressivity”: the idea that student debt cancellation is regressive because it involves a public transfer to a relatively well-off group—those with some college education.

In this issue brief, we offer three key takeaways for policymakers.

1. Contrary to common misperceptions, careful analysis of household wealth data shows that student debt cancellation—at all proposed levels—is progressive; it 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 reason for this progressivity is simple: People from wealthy backgrounds (and their parents) rarely use student loans to pay for college.
2. More substantial student debt cancellation plans, like the Warren-Schumer plan, are in fact more progressive.
3. Income eligibility cutoffs and income-driven repayment are inefficient and counterproductive ways to achieve progressivity.

The regressive cancellation myth rests on a series of misleading methodological foundations: including private student loans in calculations of cancellation, conditioning analyses on borrowers only, focusing primarily on debtors’ income rather than wealth, basing calculations on the value of debt to the government rather than the value to borrowers, and ignoring the racial distribution of debt.

In this brief, we correct these errors by:

• Distinguishing federal loans from private debt to reflect existing proposals for debt cancellation by executive action;
• Including the full population in our analyses, not just borrowers;
• Modeling redistribution by wealth, not income;
• Valuing student debt by what it costs borrowers, not lenders; and
• Disaggregating the distribution of debt by

After making these corrections, the progressivity of debt cancellation becomes apparent. For example, in the case of the Warren-Schumer proposal for cancelling $50,000 in debt:

• The largest share of debt cancellation dollars goes to people with the least wealth, which addresses (but does not close) the racial wealth gap. The average person in the 20th to 40th percentiles for household assets would receive more than four times as much debt cancellation as the average person in the top 10 percent, and twice as much debt cancellation as people in the 80th to 90th percentiles (see Figure 3).
• Debt cancellation addresses racial disparities in debt burdens by benefiting those who carry the biggest loan At every point on the income and asset distributions, Black households would gain equally or more from cancellation relative to white households. Upwardly mobile Black and Latinx people in the 50th to 90th income percentiles would receive the largest average cancellation. This reflects the fact that Black and Latinx students typically have to borrow more for college expenses than white students of comparable income due to the racial wealth gap in family resources (see Figures 1 and 5).
• A key metric for financial well-being is the debt-to-income Debt cancellation leads to the highest reductions in the debt-to-income ratio for people with the lowest incomes. As household income increases, the reduction in the debt-to- income ratio decreases (see Figure 4).
• Estimated debt cancellation from the Warren-Schumer plan is only $562 per person (including non-borrowers) in the top 10 percent of households for net worth. Estimated cancellation is $17,366 for Black persons and $12,617 for white persons in the bottom 10 percent for net worth (see Figure 7).
• If one analyzes student debt by income instead of wealth, neglects to disaggregate by race, neglects to exclude private debt, and values debt cancellation without a debt-to-income ratio (Catherine and Yannelis 2020), it will misleadingly appear that people in the 60th to 90th income percentiles receive twice as much benefit from cancellation as people in the 30th to 40th percentiles (see Figure 1).

In short, the debt cancellation proposal is progressive. It addresses long-standing racial inequities and leads to sharp improvements in household financial well-being.

Footnotes

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