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

Student loan forgiveness is regressive whether measured by income, education, or wealth
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Some student loan advocates have advocated foregoing student loans because student loans contribute to racial and socioeconomic wealth gaps. However, the usual measures of financial wealth are a misleading indicator of the economic status of student borrowers. Medical school graduates usually owe six-figure student loans, but that doesn’t mean they’re poorer than high school graduates who didn’t go to college. Wealth, if properly measured, should include the value of educational investments borrowed by students. When measured appropriately, student debt is concentrated among high net worth households and loan forgiveness is retroactive whether measured by income, educational attainment, or wealth. Thus, universal toleration is a costly and ineffective way of reducing economic gaps by ethnicity or socioeconomic status. Only targeted policies can address the inequalities caused by federal student loan programs.

  • The persistence of the wealth gap between blacks and whites is worrying and worth addressing. Comprehensive student loan debt forgiveness is not a good way to address this problem. There are better, more effective and progressive ways to reduce racial wealth gaps.
  • Whether measured by income or wealth, student loan borrowers fare better than other Americans, and broad loan forgiveness is regressive. Some argue that loan forgiveness is not retroactive when measured by financial wealth. But this is because such measures exclude the very assets that a person has borrowed to purchase – the education that increases his earnings throughout his life. This is similar to assessing a homeowner’s wealth by calculating the mortgage balance but not the value of his home.
  • For many borrowers, the amount they are required to repay on their student loans is much less than the amount they borrowed due to current income-based repayment plans and forgiveness programs. We can and must make these programs work better.
  • When properly accounting for both human capital and the impact of subsidies on student lending schemes, roughly a third of all student debt is owed by the richest 20 percent of households and only 8 percent by the bottom 20 percent. Universal Student Loan Forgiveness is retroactive as measured by income, family wealth, and educational attainment — as well as wealth.

Figure 1 - Who owes the student's debt according to income and one-fifth of wealth

  • Racial lifelong wealth gaps are larger when measured including the market value of educational attainment. But the main reasons for this gap, as it relates to post-secondary education, is that black Americans are less likely to have the opportunity to go to college in the first place, to attend a high-quality, low-cost college, to complete a degree and obtain an undergraduate or professional degree than white peers. Black graduates are also less rewarded in the labor market than the degrees they complete. In part because of all this, black borrowers are struggling more with paying off their student loans. But the contribution of student loans to wealth and income gaps is small, and the effects of loan-forgiveness policies on the economic gaps are surprisingly unclear.
  • The best way to use federal post-secondary education systems to bridge racial and socioeconomic gaps in income and wealth is through tested grants and loan aid that promote access to and completion of high-quality educational institutions; strict control over institutions participating in federal programs; Progressive, well-designed, well-managed, income-based repayment plans that isolate borrowers whose education is not paying off, and aim for relief for borrowers who can demonstrate that their loans are posing significant economic hardship.
  • Legislators must first decide how much taxpayers must pay in tuition and living expenses for future students—a process that will undoubtedly choose, in the name of fairness and efficacy, to treat undergraduate, graduate, and professional students differently, need, and reduce subsidies for high-cost programs—and use This is a model for providing retroactive relief to existing borrowers who have missed out on those benefits while asking others to repay their loans.

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