Getting Rad, Not Even: Universal Student Debt Write-Offs Get Results, But Not the Best Ones

The outstanding $1.3 trillion in student loan debt is money many Americans feel they could be spending on other things. This election cycle, it’s proven to be one of the most talked-about issues among liberal politicians, with none going as far as the Green Party candidate Jill Stein, who this summer proposed eliminating all student debt in a process based on quantitative easing (or QE). Smart money won’t bet on a Stein presidency, but her proposal is an instructive illustration of the pitfalls of student debt forgiveness.

A student debt write-off has worrying implications for the already tremendous wealth gap that separates America’s rich from its poor, and could exacerbate the racial wealth gap as well, according to a 2015 Demos study. To get a picture of how wealth would change for different households under a student debt forgiveness scheme, we used the Federal Reserve’s 2013 Survey of Consumer Finances (SCF) to explore student debt levels among American families.

Just 20% of all American households had any education debt at all, and borrowers with progressively higher levels of education show higher average debt burdens than their less-educated peers, but also higher average earnings. Those with graduate degrees have both the highest debt and the highest earnings. That’s not exactly surprising: graduate school is tremendously expensive, and students are eligible for practically unlimited federal loans, but even students who drop out of grad school can still rely on their bachelor’s degree for career opportunities and household earnings.

Household Earnings and Debt By Highest Credential Earned

Source: New America analysis of Federal Reserve Board's Survey of Consumer Finance, 2013. 

The average student debt burden for borrowers with graduate degrees is more than twice the average for those with no postsecondary degree, but the average earnings of households with one or more adults with graduate degrees are three or four times greater. And while the average debt among households with at least one advanced degree is about 27 percent of their annual household earnings, the average borrower with no postsecondary credential owes about 40 percent of theirs. In dollar terms, forgiving all student debt would have the largest benefit to families with the most education and the highest earnings: those with Master’s degrees or higher would see their net wealth increase by over $50,000, while those with no postsecondary credential would gain less than $20,000.

A similar dynamic surfaces along racial lines. The average white family would gain $31,000 from a debt forgiveness policy, while black families would receive just under $24,000. Indeed, the Demos study’s findings suggest that Stein’s strategy would disproportionately benefit white borrowers with larger loan balances, increasing the wealth gap between young white and black families by about $3,000.

Household Earnings and Debt by Race

Source: New America analysis of Federal Reserve Board's Survey of Consumer Finance, 2013.

Differences in borrowing behavior and degree attainment along racial lines help explain this pattern. The SCF shows a higher rate of student borrowing among black families than white ones: about 32 percent of black families had outstanding student debt, while this number was just 18 percent for whites. Only 14 percent of Hispanic Americans have student debt, and so would also benefit less than whites from a student debt write-off, but for a different reason. Demos also suggests that, owing to their lower household wealth and other barriers Latinos face when hoping to pursue postsecondary education, the white-Latino wealth gap would expand even more than the black-white gap if debts were universally forgiven. 

Since a larger proportion of white borrowers have graduate-level education,  their larger debt loads are tied to career growth and higher earnings over the course of a lifetime. These high-debt, high-earning borrowers are at the heart of Demos's findings on universal debt forgiveness. Eliminating debt for only low- and middle-income families would reduce the racial wealth gap because it would exclude many high-income borrowers who are much more likely to have completed an advanced degree (and who are disproportionately white). 

Borrowers of all varieties stand to benefit from proposals targeting debt reduction, but some would gain much more than others. Given the enormous costs of universal debt forgiveness, we might do better to focus on reducing the overall costs of college and promoting income-driven repayment plans to help borrowers who are truly struggling with their existing debt loads. Stein’s proposal looks unlikely to gain traction in mainstream politics, and that may be for the better. But it's a useful illustration of the many pitfalls of attempts at reducing outstanding debt for those with advanced degrees: such measures risk deepening the disparities that postsecondary education is idealistically intended to erase.

Methodology: New America completed the above analysis using the 2013 Survey of Consumer Finances. All income and debt information is based on the combined household, while race and credential information describe the household head. All numbers shown are mean values for each group. For information about household wealth, we rely on Demos 2015 paper which uses the same data set and can be found here.