Eliminating all student debt isn’t progressive – and neither is this alternative
Eliminating all student debt has become a fashionable idea on the left, prompting New York Times opinion columnist David Leonhardt to remind progressives that wiping away $1.5 trillion in student loans would be, in his words, “a giant welfare program for the upper middle class.”
He’s correct. An analysis by the Urban Institute shows that the top 25% of American households by income hold nearly half of all student debt—and the bottom 25% holds just a tenth of it. Canceling all outstanding student loan balances would therefore deliver $5 to rich Americans for every $1 given to poorer families. There’s nothing progressive about a policy like that. However, Leonhardt’s proposed alternative, expanding the income-based repayment program, suffers from the exact same flaw.
Income-based repayment (IBR) allows recent student borrowers to cap annual payments at 10% of their discretionary incomes, and have the remainder of their loan balances forgiven after 20 years in the program. Certainly, IBR provides important security for lower-income borrowers, since payments are commensurate with ability to pay. But the program comes with a dark side as well: billions of dollars in loan forgiveness for privileged borrowers with large balances.
According to Department of Education estimates, 41% of loans in IBR belong to borrowers with incomes above $100,000. Just 3% of these loans belong to borrowers who earn less than $40,000. Even though student debt is concentrated among richer Americans, the distribution of IBR borrowers skews even wealthier.
Why are rich people more likely to use IBR? Almost two-thirds of loans in IBR belong to borrowers with some graduate education. Unlike undergraduates, graduate students may borrow unlimited amounts from the federal government, allowing them to accumulate huge debts. Even though graduate students generally go on to high-paying careers, the sheer scale of their debts means that the federal government will end up forgiving much of these students’ loans.
One graduate of the dental school at the University of Southern California has racked up a million dollars in federal student loans. Despite his $225,000 salary, his income-based payments are not enough to cover the interest on his loan, and so taxpayers will forgive seven figures’ worth of debt when his repayment cycle is finished. These are the sorts of people who gain the most from IBR.
The people who need the most help with their student loans, by contrast, tend to have very low balances. Most borrowers who have defaulted or become delinquent on their debt did not finish college, took out loans for fewer years, and had less time to accumulate large balances. But just 11% of the loans in IBR belong to people with less than a bachelor’s degree.
Tying loan payments to income is not inherently regressive. But since graduate student borrowing is uncapped and payments do not vary with loan balance, IBR is forced to benefit borrowers with larger balances, who usually have high incomes and advanced degrees. Changes under the Obama administration, which lowered payments from 15% to 10% of discretionary income and shortened time to forgiveness from 25 to 20 years, only exacerbated this problem. The program is already very generous, but towards the wrong people.
Making IBR even more generous—say, by lowering monthly payments or shortening the time to forgiveness—may indeed help some people who truly need it, but at the cost of delivering even bigger taxpayer subsidies to borrowers with graduate degrees and six-figure incomes. Dollar-for-dollar, the wealthy professional class stands to gain far more from IBR expansion than borrowers struggling to make ends meet.
Instead, policymakers should focus their efforts on raising awareness of these repayment options among vulnerable populations. Just 43% of undergraduate borrowers are aware that income-driven repayment is even an option, compared to 60% of borrowers studying for a master’s degree and 73% of those studying for a professional degree such as law or medicine. Better information would do more for borrowers than bigger subsidies, and at a fraction of the cost.
It’s heartening to see progressives look for reforms to student loans beyond just canceling all outstanding debt. But they should be aware that many of the alternatives also entail large, regressive subsidies, just on a smaller scale. Expanding income-based repayment is one of those: a handout to the rich, dressed up as social justice.