Expert Commentary

Federal student loan forgiveness: Research to help journalists

We spotlight academic research and government reports to help journalists answer some of the questions remaining about the new student loan forgiveness program.

federal student loan forgiveness research college debt

As adults with federal student loans await new details about the widespread loan forgiveness program President Joe Biden announced Aug. 24, many journalists will be trying to answer questions such as:

  • How much will the program cost?
  • Who will benefit most?
  • What could be the unintended consequences?

To help, we’ve gathered and summarized a sampling of academic research and government reports that provide insights on Biden’s historic program, which offers adults earning less than $125,000 a year a one-time opportunity to erase up to $10,000 in federal student loan debt.

Borrowers qualify for a $20,000 loan reduction if they received Pell Grants, money the federal government gives low- and middle-income students to offset a portion of their higher education costs.

The White House estimates as many as 43 million people with outstanding federal student loan debt will qualify. Close to half could see their whole balances vanish. The U.S. Department of Education will make applications available by early October.  

Debt cancellation is one component of Biden’s three-part plan. He also extended the pause on federal student loan payments, ordered early in the pandemic, until Dec. 31. The new loan forgiveness program, which Biden implemented through executive action, increases the income threshold used to determine which borrowers qualify for Income-Driven Repayment plans, commonly referred to as IDR plans.

Borrowers on IDR plans make smaller monthly loan payments because payment amounts are based on income. Not only will higher-earning adults become eligible for IDR plans, the federal government also plans to discharge loan balances after 10 years of payments — instead of 20 years — for borrowers whose original loans were $12,000 or less.

Below, you’ll find government reports offering estimates on the cost of Biden’s plan and similar loan forgiveness initiatives plus research on who benefits most when the federal government makes changes aimed at reducing college debt loads.

We’ve also included three reports that provide additional context, including one the U.S. Government Accountability Office released in July criticizing the U.S. Department of Education for vastly miscalculating the cost of providing federal Direct Loans to help students and their parents pay for postsecondary education.

If you’re looking for practical guidance on covering student loan forgiveness, read our new tip sheet, created with help from Washington Post reporter Danielle Douglas-Gabriel, who covers the economics of higher education.

Cost estimates

Assessing Debt Relief’s Fiscal and Cash-Flow Effects
The White House, August 2022.

In this brief report, released Aug. 26, White House officials discuss how the new student loan forgiveness program will affect the federal government’s cash flow, which, they write, “is what matters when it comes to federal borrowing and the national debt.”

Because borrowers typically repay their loans over many years, the loss of revenue in the form of student loan payments will be felt over the next decade or more.

“Assuming a take-up rate of 75 percent, we estimate that over the decade from 2023-32, the average cash flow impact will be approximately $24 billion annually,” officials write.

The U.S. Department of Education is working with the U.S. Office of Management and Budget to estimate the budgetary impact, which will depend on variables such as interest rate projections and the portion of borrowers who successfully apply for debt relief.

White House officials note that many borrowers will resume making student loan payments in January, following a two-year payment pause prompted by the pandemic. The report cites a Goldman Sachs analysis that concludes that a debt forgiveness program that reduces monthly loan payments “is slightly inflationary in isolation, but the resumption of payments is likely to more than offset this.”

The Biden Student Loan Forgiveness Plan: Budgetary Costs and Distributional Impact
Junlei Chen and Kent Smetters. Report from the University of Pennsylvania’s Penn Wharton Budget Model, August 2022.

In this five-page report, researchers examine the cost of Biden’s loan forgiveness initiative. They estimate the debt cancellation piece of the program alone will cost between $468.6 billion and $519.1 billion, “with about 75% of the benefit accruing to households making $88,000 or less.”

They also estimate that:

  • The proposed changes to IDR plans will cost $70 billion.
  • The payment pause in 2022 will cost an additional $16 billion.
  • The total cost of the program could exceed $1 trillion.

Who benefits most?

The Distributional Effects of Student Loan Forgiveness
Sylvain Catherine and Constantine Yannelis. National Bureau of Economic Research working paper, updated in April 2021.

In this working paper from the National Bureau of Economic Research, researchers investigate how the design of student loan forgiveness programs affects different groups of borrowers. Among the main takeaways: Universal student loan forgiveness policies, which discharge all borrowers’ debt, and capped forgiveness policies, which erase all debt below a certain amount, such as $10,000 or $50,000, disproportionately benefit high-income borrowers.

Meanwhile, expanding the number of borrowers eligible for IDR plans — a third type of student loan forgiveness – benefits lower- and middle-income borrowers, the authors write in the 58-page paper.

The authors study these three types of loan forgiveness programs under varying scenarios to estimate how much money borrowers of different income levels and racial and ethnic groups would save.

They find that when higher-income borrowers participate in universal and capped loan forgiveness programs, they benefit because they tend to have more education debt, some or all of it incurred during graduate school, including law school and medical school.

On the other hand, IDR programs benefit lower- and middle-income borrowers because they allow adults to make loan payments based on their earnings. Adults whose incomes fall below a certain threshold pay the lowest monthly loan payments. Some pay nothing at all. And after making those reduced payments for a certain number of years, their remaining balance is discharged.

Across their analyses, universal loan forgiveness programs are regressive, meaning they benefit higher-income borrowers, but expanding IDR plans leads to more forgiveness for lower and middle-income borrowers.

“Under a policy enrolling all borrowers who would benefit from IDR, individuals in the bottom half of the earnings distribution would receive three-fifths of dollars forgiven and borrowers in the top 30% of the earnings distribution receive one-third of dollars in forgiveness,” the authors write.

Who Are the Federal Student Loan Borrowers and Who Benefits from Forgiveness?
Jacob Goss, Daniel Mangrum, and Joelle Scally. Liberty Street Economics, Federal Reserve Bank of New York, April 2022.

This brief report from the New York Federal Reserve examines four student loan forgiveness policies to determine which borrowers benefit most. They compare borrowers by characteristics such as age, credit score and the demographics of their neighborhood.  

The analysis suggests:

  • Loan forgiveness mostly benefits borrowers with lower credit scores, frequently used as a proxy for financial instability. Credit scores typically range from 300 and 850. “Under all four policies, more than half the share of forgiven debt would go to borrowers with a credit score below 660,” the authors note.

  • Forgiveness policies primarily benefit borrowers under age 40. “Those over 60 years old benefit the least from forgiveness,” the authors write. “Despite being 32 percent of the U.S. adult population, those 60 and older only receive around 6 percent of forgiven dollars, roughly in line with the share of this age group that owes federal student loans.”
  • If the federal government were to forgive $10,000 in federal student loan debt for each borrower, “33 percent of forgiveness would go to majority-minority neighborhoods while 67 percent would go to majority white neighborhoods.”

Other research to consider

Accounting for the Rise in College Tuition
Grey Gordon and Aaron Hedlund. National Bureau of Economic Research working paper, February 2016.

This study finds the sharp increase in college tuition between 1987 and 2010 was largely driven by an expansion of the Federal Student Loan Program.

Researchers designed a simulation that allowed them to examine whether and how various factors affected tuition prices during that period and test the so-called Bennett hypothesis, which asserts, as former Secretary of Education William J. Bennett did in the 1980s, that colleges respond to increases in financial aid by increasing tuition.

Between 1987 and 2010, several financial aid reforms were implemented, including the introduction of unsubsidized loans and increased limits on some grants and subsidized loans. Over those 20-plus years, net tuition in the U.S. rose 106%, on average.

The authors find that reforming the Federal Student Loan Program generated a 102% tuition increase. If those financial aid changes had not been made, net tuition would have risen 16%, according to the model.

Financial Aid Offices Face Intensifying Staffing Challenges Amid Pandemic
National Association of Student Financial Aid Administrators, May 2022.

This report examines the challenges college financial aid offices in the U.S. have faced trying to meet student needs amid the pandemic and staffing shortages.

Months before Biden announced his massive loan forgiveness initiative, many financial aid offices already were in “crisis” mode, according to the report, compiled by the National Association of Student Financial Aid Administrators, a nonprofit organization representing more than 32,000 financial aid professionals at nearly 3,000 higher education institutions.

The 69-page document discusses the results of two online surveys the organization conducted in March and May of 2022. Financial aid staff from 518 schools participated in the first survey and financial aid staff from 507 other institutions completed the second.

“What we learned is simple: What was once a challenge — albeit a manageable one — has become a crisis for many institutional financial aid offices that are struggling to remain administratively capable and adequately serve students, whose own needs have increased in the last two years,” the authors write.

About 41% of employees who were asked how easy or difficult it had been to fill vacant positions with qualified staff said it had been “difficult.” Another 43% said it had been “very difficult.”

Of the employees asked whether their office had the staffing and resources necessary to adequately administer federal financial aid programs, 46% of those working at public universities said no, as did 37% of those working at community colleges. Meanwhile, 38% of staff working at private, nonprofit institutions said they did not.

Student Loans: Education Has Increased Federal Cost Estimates of Direct Loans by Billions Due to Programmatic and Other Changes
U.S. Government Accountability Office Report No. GAO-22-105365, July 2022.

The U.S. Department of Education botched its estimate for the amount of money the federal government would make off federal Direct Loans, which help students and their parents pay for education beyond high school, from 1997 through 2021, according to this performance audit conducted by the U.S. Government Accountability Office, a watchdog agency within Congress.

The education department “originally estimated these loans to generate $114 billion in income for the government,” the agency writes. “Although actual costs cannot be known until the end of the loan terms, as of fiscal year 2021 these loans are estimated to cost the federal government $197 billion.”

The report outlines some of the reasons the estimate is so far off. The biggest reason: Education officials made erroneous assumptions about borrowers’ behavior, including how much they would borrow, which repayment plans they would choose and whether they would prepay or default on their loans.

Another factor that has driven up costs: The federal government has allowed borrowers to stop making loan payments since the start of the pandemic. That payment pause is set to end Dec. 31, 2022.

“According to our review of Education data, COVID-19 emergency relief provided from March 13, 2020 through April 30, 2022 was estimated to increase Direct Loan costs to the federal government by about $102 billion,” the Government Accountability Office writes.

The agency notes how difficult it is to predict student loan costs when loan payment amounts can change substantially for adults enrolled in Income-Driven Repayment plans. The amount those borrowers are required to pay each month changes according to their economic situation.

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