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A Gift to the Downtrodden?

October 5, 2022 By Debbie Young

Professor Warren speaks about mortgage loan disclosures. Photo courtesy of CFPB December 6, 2010.

Not so fast.

According to Elizabeth Warren, Massachusetts’ senator, Republicans are “doing everything they can to stop President Biden from cancelling student debt for the people who need it the most.”

What, you might wonder, does Sen. Warren mean when she tweets about “serving the people most in need of help?” Perhaps she is pointing to Democrats seeking re-election.

What can the American taxpayer expect? Borrowers are about to receive, thanks to Biden’s generosity with taxpayer money, plenty of help. James Freeman as far back as 2020, noted in his column in the WSJ the work of economists Sylvain Catherine of the University of Pennsylvania’s Wharton School and Constantine Yannelis of the University of Chicago’s Booth School of Business:

Many holders of high loan balances completed graduate and professional degrees, and consequently earn high incomes. Untargeted debt forgiveness policies could thus disproportionately benefit high earners.

While direct debt discharge has dominated many public discussions, much of the public discourse misses the fact that significant targeted debt forgiveness already exists in the United States for some borrowers. Importantly for most borrowers, Income-Driven Repayment (IDR) plans also offer substantial loan forgiveness to low-income borrowers who have balances remaining after twenty to twenty-five years, depending on a borrowers’ specific plan. In the meantime, IDR plans link payments to income, so borrowers with persistently low incomes will only reimburse a fraction of their debt before it is forgiven.

Student loan cancellation tends to favor the affluent.  According to the Committee for a Responsible Federal Budget:

The Biden Administration’s new $420 billion student debt cancellation and repayment pause plan will deliver the majority of the benefits to those in the top half of the income spectrum according to our estimates. Using the methodology put forward by Catherine and Yannelis, we find that 57 percent to 65 percent of the extended pause and cancellation will go to those in the top half of the income spectrum. Other recent estimates also find the cancellation is less progressive than suggested.

Numerous studies have established that simply canceling $10,000 per borrower of student debt would disproportionately benefit those in the top half. However, the Administration’s latest proposal aims to counteract the regressivity by means-testing benefits for very high income households and doubling the amount cancelled for those who received Pell Grants.

In the end, the Administration’s student debt cancellation proposal is costly, inflationary, will drive up higher education costs, and will deliver the majority of the benefits to those in the top half of the income spectrum.

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Debbie Young
Debbie Young
Debbie, our chief political writer of Richardcyoung.com, is also our chief domestic affairs writer, a contributing writer on Eastern Europe and Paris and Burgundy, France. She has been associate editor of Dick Young’s investment strategy reports for over five decades. Debbie lives in Key West, Florida, and Newport, Rhode Island, and travels extensively in Paris and Burgundy, France, cooking on her AGA Cooker, driving through Vermont and Maine, and practicing yoga. Debbie has completed the 200-hour Krama Yoga teacher training program taught by Master Instructor Ruslan Kleytman. Debbie is a strong supporting member of the NRA.
Debbie Young
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