4 in 5 borrowers could benefit from student loan forgiveness, but the price tag is high: NY Fed

Since President Joe Biden took office, progressive lawmakers and advocates have been calling on his administration to cancel $10,000 worth of student loan debt per borrower — something Biden campaigned on as a presidential candidate. Many prominent Democrats, including Sen. Elizabeth Warren and Senate Majority Leader Chuck Schumer, have even urged the president to increase the maximum forgiveness amount to $50,000.

Opponents argue that blanket student loan forgiveness would disproportionally benefit wealthy borrowers while adding to the federal deficit. House Republicans on the Committee on Education & Labor recently told Biden that "reckless loan forgiveness policies would crush American taxpayers" rather than address the root of the problem: a broken federal servicing system.

This week, economists at the Federal Reserve Bank of New York released a study finding that blanket student loan forgiveness could cost up to $904 billion while primarily benefiting young and sometimes affluent borrowers. However, adding a $75,000 income cap "substantially reduces the cost of student loan forgiveness" and ensures that the most vulnerable borrowers would equally benefit.

Keep reading to learn more about the New York Fed's report on canceling student loan debt, including who benefits from these proposals and who qualifies. And if you have private student loans that aren't eligible for federal debt relief, you may be able to reduce your monthly payments and pay off debt faster by refinancing. You can visit Credible to compare student loan refinance rates for free without impacting your credit score.

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Student debt cancellation primarily benefits young, middle-income borrowers

Federal Reserve economists found that canceling up to $10,000 in student debt per borrower would eliminate the entire loan balance of 11.8 million Americans, which is nearly a third (31%) of all federal student loan borrowers — but it would also cost the government $321 billion.

By increasing the maximum forgiveness amount to $50,000, the number of borrowers who would have all of their student loan debt discharged rises to 29.9 million, or about 80% of all Americans with federal student loans. This also significantly adds to the taxpayer burden, costing an estimated $904 billion.

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The study found that widespread student loan forgiveness is more likely to benefit wealthier borrowers. Middle-income earners comprise the largest share of beneficiaries for both $10,000 and $50,000 debt cancellation proposals, followed by high-income borrowers. The lowest-earning group (living in an area with a median annual income below $46,310) would benefit the least from blanket relief policies.

This is likely because borrowers in high-income areas "are more likely to owe federal student loans and hold higher balances," the authors said. The wealthiest quartile of borrowers hold 33% of all outstanding federal loan balances, despite being 25% of the total population.

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Additionally, about two-thirds (67%) of borrowers who would benefit from student debt cancellation are under 40 years old. But these borrowers only account for 57% of the loan balances owed, suggesting that those with large debt balances are likely to be older. Increasing the maximum forgiveness amount to $50,000 "shifts a larger share of forgiven debt to older borrowers."

Americans over 40 may have higher debt balances due to borrowing for graduate school, the authors said. Plus, graduate student borrowers may have private student loan debt in addition to their federal loans due to borrowing limits set by the Department of Education. If you have private student loans that won't qualify for federal student loan programs, you might consider refinancing to a lower interest rate. You can learn more about student loan refinancing on Credible.

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An income cap could target the most needy borrowers

Some policymakers have suggested implementing an income cap to address the high price tag of broad student debt forgiveness and ensure that wealthy borrowers don't benefit disproportionately. Under Sen. Warren's proposal, for example, the maximum forgiveness amount phases out among higher income thresholds.

The Fed economists determined that adding a $75,000 income cap would cut the cost of student loan forgiveness by nearly half. The cost of forgiving $10,000 worth of student loan debt drops from $321 billion to $182 billion with this income threshold. And for a maximum forgiveness amount of $50,000, the price tag is reduced from $904 billion to $507 billion.

Importantly, income restrictions would essentially redirect funding from wealthy borrowers to those with lower incomes. Adding a $75,000 income cap would benefit a larger proportion of low-income borrowers and reduce the number of high-income beneficiaries. The share of middle-income earners who receive student loan forgiveness would stay about the same.

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Although an income cap would make student debt cancellation more equitable, it would disqualify many borrowers. Americans with incomes over $74,000 hold about 60% of all student loan debt, according to the Education Data Initiative. 

It's important to note that the Biden administration hasn't yet announced plans to cancel student loans, with or without an income cap. But if you earn too much to qualify for federal student loan relief, then you might consider refinancing to a private loan at a lower interest rate. Keep in mind that refinancing your federally held debt would make you ineligible for deferment, forbearance and future debt forgiveness proposals.

For borrowers who don't plan on utilizing these benefits, though, student loan refinancing may translate to thousands of dollars worth of savings on the remaining balance. You can use Credible's student loan refinance calculator to determine if this repayment plan is right for your financial situation.

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