What Happens If Student Loans Are Forgiven

What Happens If Student Loans Are Forgiven – At the same time, the COVID-19 pandemic has caused historic levels of unemployment and economic hardship. Even before the epidemic, many student loan borrowers faced payment burdens of more than 10 percent of household income or debt traps that could not keep up with monthly interest rates (Farrell, Greig, and Sullivan 2020). The administration has suspended payments and interest on federal student loans beginning in March 2020 to ease the financial burden caused by the disaster. In addition to this temporary relief, policymakers have proposed permanent federal student loan forgiveness, which accounts for 92 percent of all student loan debt (Amir, Tesla, and Marzaha 2020).

In this perspective, we use bank and credit management data to estimate how the benefits of different debt relief scenarios are distributed based on household income, borrowers’ remaining time to repay the loan, and borrowers’ race and ethnicity.

What Happens If Student Loans Are Forgiven

We can consider four scenarios: (1) global write-off of up to $10,000 from the creditor’s balance; (2) cancellation of up to $50,000 of debt for individuals earning less than $125,000; (3) Exemption up to $25,000 for individuals earning less than $75,000 and earning $100,000. and (4) an exclusion of up to $50,000 with income equal to the condition 3 exclusion.

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From relevant bank and credit data, we calculate student loan balances, annual income and loan repayment patterns in 2016 to account for many aspects of these hypothetical foreclosure scenarios. First, how much debt is canceled? Second, how is the canceled debt spread across the income distribution—how much goes to high-income households? Third, how much of the foreclosed loan do people who are on track to pay off their loan on time and will never be able to pay it off in full? Finally, how is canceled debt distributed across races and ethnicities?

We find that income reductions significantly reduce the total amount of debt forgiven and cause foreclosures to occur with fewer delays, while examining the distribution of forgiveness among borrowers by gender across all foreclosures. . The $10,000 universal exemption forgives a quarter of all student loan debt, while the $50,000 income limit forgives half of all debt. A $25,000 income exclusion write-off cancels the same amount of debt as a $10,000 global write-off. Repeal also disproportionately benefits higher-income households, although the income target makes repeal less likely. This relative regression is due to the fact that higher-income households have more debt, often from a professional degree or college degree. In contrast, a more aggressive income target does not necessarily result in a greater portion of forgiveness for borrowers in the debt trap or facing long repayment prospects. However, increasing the total withdrawal slightly increases the proportion of forgiveness received by borrowers with longer payment prospects. The proportion of claims received across races and ethnicities is largely unaffected by income targeting and reflects the proportion of total debt attributable to race and ethnicity.

For example, a $25,000 write-off between incomes of $75,000 and $100,000 would forgive the same amount of total debt as a $10,000 universal write-off (28 percent vs. 27 percent), but would give low-income borrowers $3.85 for every dollar paid. . loan A $50,000 free loan with the same higher debt forgiveness (39 percent of the total loan) and eliminates some repayments, but more general forgiveness for low-income borrowers, borrowers in debt trap or long repayment periods. and serves black and Latino borrowers.

It should also be noted that several options available to policymakers are not considered here due to our data limitations. For example, graduate loan forgiveness is likely to make forgiveness more repeatable and lower overall costs. The forgiveness of accrued interest is also likely to be gradual, as people who have the means to repay their debt are unlikely to have accumulated much interest.

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One finding: The cancellation scenarios considered would forgive between 27 and 50 percent of total federal student loan debt.

Figure 1 shows the total amount of debt canceled in each case. Since we only keep household income in our checking account data, we convert gross incomes of $75,000, $100,000, and $125,000 to net income limits of $54,263, $72,350, and $90,438. Assuming an additional tax rate of 20%. 7.

A $50,000 health income exemption would forgive the total debt (50 percent of total debt), or $786 billion of the $1.566 trillion base. More aggressive income limits, such as removing income from $75,000 to $100,000, would significantly reduce total cancellable debt (39 percent of debt, or $606 billion) to the same $50,000 that can be cancellable for individuals. A write-down of $25,000 further reduces the total debt forgiven (28 percent, $446 billion), while a write-down of $10,000 does not reduce total forgiveness by much more (27 percent, $422 billion), albeit marginally. It is given to individual borrowers. In total, these changes leave between $919 billion and $1.283 billion in federal and private student loan debt, similar to the 2014-2012 level.

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Note: Based on total outstanding student loans of $1.6 trillion. This assumes that gross income is subject to household income limits based on a federal withholding tax of 20 percent and a payroll tax of 7.65 percent. The “income limitation” limits the exclusion to people who earn less than $125,000 a year. A “phase-out” provides full coverage for people making less than $75,000 a year and lowers co-payments as income increases so that people making more than $100,000 pay no co-payments.

Second finding: Student loan cancellations disproportionately benefit high-income families, although income goals make loan cancellations less repayable.

We find that a disproportionate amount of loan forgiveness goes to high- and moderate-income families in all of the cancellation scenarios we consider because high-income families tend to have more student debt. However, more aggressive revenue targeting could make the cancellation program more successful.

The left panel of Figure 2 shows the ratio of total dollar withdrawals to each income quintile and the income thresholds for each quintile.

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The two graphs on the left show the distribution of dollar withdrawals by income quintile. The bar chart on the right shows the fraction of each quintile whose student loans were completely eliminated.

Note: Based on November 2016 balances. Income is household income deposited into a Chase checking account between December 2015 and November 2016. Income categories based on the entire Chase-Experian sample, including those without student loans. The “income limitation” limits the exclusion to people who earn less than $125,000 a year. A “phase-out” provides full coverage for people making less than $75,000 a year and reduces co-payments as incomes rise so that people making more than $100,000 pay no co-payments. This assumes that gross income is converted to the household income limit based on a federal withholding tax of 20 percent and a payroll tax of 7.65 percent.

Under the $10,000 universal repeal (shown in blue), only 12 percent of the repeal dollars would go to the bottom quintile (that is, the lowest 20 percent of earners), while 23 percent would go to the highest earners. In the $50,000 per capita income scenario (green), the top quintile of income receives almost no discount because most people in the top quintile exceed the $125,000 gross income ($90,438 net income threshold). However, the rate of forgiveness is slightly higher for low-income families (14 percent) while the rate is higher for borrowers in the 3rd and 4th. This is due to high balances held by high-income families, such as large loans for vocational school, medical school, etc., discussed further in Figure 3, below. The $25,000 and $50,000 income exemptions and cancellation requirements are evenly distributed across income groups, providing more relief to borrowers in the 1st quintile, while middle-income borrowers (quintile 3) still have approx. They receive twice as much. Like loans in quintile 1.

The right panel of Figure 2 shows the number of people in the quintile who had all their loans forgiven. The $10,000 universal write-off would completely eliminate the student debt of 48 percent of the lowest-income group, compared to 32 percent of the highest-income group. $50,000 cancellation policies eliminate all debt from 87 to 90 percent of the top three debt quintiles. Note that the two $50,000 policies have the same results at this income limit because there are no income limitation conditions affecting quintiles 1 and 2 and most of quintile 3. The $25,000 option excludes many people from this limit entirely. in which between 50,000 dollars option (70-75 percent).

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This trend is not surprising given the distribution of balances in each income quintile, which can be seen in Figure 3. For example, average debt

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