Student loan debt holders on federal public assistance programs have found themselves in the worst-case scenario
A massive debt cancellation proposal that went into effect today would do nothing to address the loans students would begin accumulating again tomorrow.
People who go to college typically do so thinking that it will leave them better off than before they enrolled. And that’s true for many students-college graduates usually earn more than $1 million more throughout their lifetimes than those with only a high school diploma. 9 But some students who take out loans and enroll with this belief never see these benefits. Instead, they are made worse off because they didn’t graduate, got little or no return on their investment, or were even defrauded by their institution-leaving many of these borrowers in a true crisis. 10 Today, 16% of households with student loan debt participate in public assistance programs (and this number is likely underreported because of stigma or confusing or uncommon program names in reporting). 11
Among all American households, 67% of low-income families with children (defined as families with income that’s less than 200% of the federal poverty level) receive food-related assistance and 60% receive public health insurance, including 9 million children who receive coverage through the Children’s Health Insurance Program (CHIP) each year. 12 In addition, nearly a quarter of families (23%) received cash assistance for their basic needs through the Temporary Assistance for Needy Families (TANF) program in 2019, and over 22 million people received the Earned Income Tax Credit (EITC) in 2018. 13 Student loan borrowers who have found themselves in these kinds of public assistance programs are among the least likely to ever be able to pay down their debt without relief. Of the entire balance of outstanding student debt, the federal government already expects to forgive around $435 billion through federal programs that provide some level of debt relief, like income-driven (IDR) repayment programs, which offer full forgiveness after 20-25 years, depending on the plan. 14 So for many of these borrowers, they may be eligible for forgiveness under current law, but unfortunately only 6% of the lowest-income borrowers are enrolled in income-driven repayment plans.
Even debt cancellation at $10,000 will still leave many struggling borrowers in debt.
Limiting debt cancellation to $10,000-the most affordable universal option currently on the table-won’t fully solve the problems faced by many of these worst-off borrowers who may hold more than $10,000 in student loan debt. When you look at the distributional effects of $10,000 of loan forgiveness, most benefits still go to the highest income borrowers. 15 Further, providing this level of loan forgiveness would leave over 25 million people with student loan debt who will still be responsible for paying it back. And for low-income borrowers participating in IDR where loan payments are limited to a percentage of their income, $10,000 will do little to ease the burden of their debt because the interest accrual on the remaining principal balance that comes with IDR plans could quickly erase the benefits of the one-time debt forgiveness payment. 16 Furthermore, IDR uses an income formula to determine payments and does not consider the total loan balance. Even if the government canceled part of the debt as part of a one-time policy change, these borrowers’ monthly loan payment would be unchanged, and it would do nothing to accelerate the timeline to full forgiveness under IDR. So our lowest-income borrowers would still be left in a lurch if they have remaining debt after a $10,000 cancellation.
The Solution
To create a debt cancellation solution that can address the needs of borrowers in crisis without an exorbitant price tag, Congress has two realistic pathways: limit the amount of forgiveness provided or limit the number of beneficiaries. In terms of benefits distribution, the latter is a much more progressive option, as it gets dollars into the hands of the borrowers most hurt by their looming loan balances. Instead of considering a blanket solution that gives an arbitrary amount of forgiveness to every single person, regardless of their ability to pay, Congress should commit to forgiving the entire balance of the loans held by those who have been enrolled in or received Supplemental Nutrition Assistance Program (SNAP), TANF, Medicaid, CHIP, EITC, housing assistance, Supplemental Security Income (SSI), and other key means-tested federal public assistance programs for at least three of the past five years.