Some Democrats are calling on President Joe Biden to forgive up to $50,000 in federal student loan debt through executive action.
Biden had proposed canceling up to $10,000 in student loan debt.
Earlier this month, White House press secretary Jen Psaki said on Twitter the Biden administration is exploring whether executive action on this issue is possible.
It comes as the pause on payments for federal student loans has been extended until at least October.
“There’s a lot of pieces to the puzzle here, obviously not all debt is created equal,” said Horacio Mendez, president of the Woodstock Institute, an economic advocacy group in Chicago. “There’s debt that’s affordable based on what income you’re able to get, and a lot of that comes with the education you get, the school you went to and the job that you were able to get afterwards. There are others who are in debt because they weren’t able to finish a program at a for-profit school that saddled them with really high and unaffordable debt, so that falls disproportionately, like most things in the economy, on low and moderate income and communities of color, especially here in Chicago.”
Constantine Yannelis is an assistant professor of finance at the University of Chicago Booth School of Business whose research focus includes student loans. He said debt forgiveness benefits higher-income earners, rather than low-income individuals.
“Because they have higher levels of student debt,” Yannelis said. “If you think of people like doctors, lawyers, a lot of business people with MBAs, they went to college for a large number of years and hence borrowed a lot, but they also earn a lot of money. On the other hand, if you look at people like high school dropouts or other people who didn’t go to college, they don’t have any student debt.”
Mendez said while student loan debt has consistently been held by higher-income families, forgiveness could still have an impact on lower-income families.
“Over 50% of the outstanding debt belongs to the top 40% of the income bracket. Now when we’re talking about the forgiveness of $10,000, not to say anything about $25,000, to somebody that’s on the lower-income side, on the bottom 20%, from a representative perspective, that’s actually a big chunk of change. While it may help the top quartile more in terms of the income ladder, I think there’s a great benefit as well for forgiveness on the lower side of that ladder.”
While there could be some stimulus from forgiving student loan debt, it wouldn’t be the most effective way to boost the economy, Yannelis said.
“There are much more effective ways of getting money to the very poorest households who will spend the most of each dollar that they are given,” Yannelis said.