Top business school profs say student loan forgiveness, is a ‘highly regressive policy’
A new study from the University of Pennsylvania and the University of Chicago shows that student loan forgiveness disproportionately benefits wealthier Americans.
This study adds to the voices calling free college and student debt forgiveness programs into question.
A working paper from professors at two of the nation’s top business schools is adding to the data calling student loan forgiveness policies into question.
University of Pennsylvania Wharton School Professor Sylvain Catherine and University of Chicago Booth School Professor Constantine Yannelis found student loan forgiveness, a policy supported by former Vice President Joe Biden, to be a “highly regressive policy,” disproportionately benefiting wealthier Americans.
Catherine took to social media to summarize the study’s core findings.
🚨New working paper🚨 with Constantine Yannelis
We study “The Distributional Effects of Student Loan Forgiveness”. We find forgiveness to be a highly regressive policy. Full cancellation would distribute $192 bn to the top 20% of earners, and only $29 bn to the bottom 20%. 1/15 pic.twitter.com/R8HRxP9E3T— Sylvain Catherine (@sc_cath) November 30, 2020
Notably, the average person in the bottom decile of income earners would receive $3,000 of balance forgiveness in present value terms, while someone in the top three deciles would receive roughly $8,000,
Our main graph shows that the average person in the bottom 10% would receive $3000 in balance forgiveness, which is only worth $1,100 in present value terms (in actual savings). Someone in the top three deciles would receive roughly $8,000 in present value terms. 2/15 pic.twitter.com/lw7vsrYaWR
— Sylvain Catherine (@sc_cath) November 30, 2020
The professors noted that benefits to black and Hispanic citizens would benefit “substantially less” than current balances suggest. They founded that the real benefit offered to African-American borrowers could be negligible, especially for a repayment plan of $10,000 per borrower.
Because African-Americans tend to carry larger amounts of debt with lower fair values, loan forgiveness policies are likely to cancel the debt that would not have been repaid in the first place.
“Overall, the bottom 10% receives less than 10% of the benefits of all the policies we consider,” concluded Catherine. “Outstanding student debt is inversely correlated with economic hardship, so it is difficult to design a forgiveness policy that does not accentuate inequality.”
Overall, the bottom 10% receives less than 10% of the benefits of all the policies we consider. Outstanding student debt is inversely correlated with economic hardship, so it is difficult to design a forgiveness policy that does not accentuate inequality. 14/15
— Sylvain Catherine (@sc_cath) November 30, 2020
[RELATED: Princeton prof declared support for Trump, though it was ‘suicidal’ to do so]
The Wharton and UChicago study adds to many other analyses questioning the efficacy and distributional effects of student debt forgiveness programs.
Matt Bruenig of the left-leaning People’s Policy Project wrote in November that “student debt forgiveness is possibly the least effective stimulus imaginable on a dollar-for-dollar basis,” since it would not lead to higher liquid cash holdings for American households.
[RELATED: Berkeley prof: ‘Law and order’ is a racist dog whistle]
Last year, the Brookings Institution called student loan forgiveness plans “regressive, expensive, and full of uncertainties.” In analyzing presidential candidate and Massachusetts Sen. Elizabeth Warren’s proposal, Brookings fellow Adam Looney found that the top 40 percent of income earners would reap 66 percent of the policy’s benefit.
Warren’s free college plan provided additional grounds for skepticism: “How can we sustain a system with open-ended borrowing and broadly available loan forgiveness?
Earlier this year, US News published data showing that the average student loan debt among recent graduates rose above $30,000 for the first time.
Catherine and Yannelis pointed Campus Reform toward a recent poll of UChicago Booth professors, who overwhelmingly agreed that paying off outstanding student loans would be net regressive.
Campus Reform reached out to Yannelis for comment; this article will be updated accordingly.
Follow the author of this article on Twitter: @BenZeisloft
