A First Look at Student Debt Cancellation

AN OVERVIEW OF THIS REPORT

We conducted the first analysis of the policy-driven student debt cancellation that has been enacted over the last several years. The cancellation we study largely took place under three programs:

1. Borrower defense to repayment: when the institution broke the law when the loans were issued, for example through fraud, the borrower’s loans don’t have to be repaid.
2. Closed-school discharge: if an institution loses its Title IV aid eligibility (from loss of accreditation, for example), then the loans taken out to attend that institution don’t have to be repaid.
3. Public Service Loan Forgiveness: borrowers with ten or more years in income-driven repayment and employment in the government or nonprofit sector can have their remaining balance written off.

Our two contributions are 1. determining who benefited from these programs, and 2. what effect cancellation had on those borrowers.

We find that the borrowers whose loans were canceled are on the whole financially worse-off than borrowers who repaid their loans. Canceled borrowers are disproportionately those who took on student debt during and after the Great Recession and have been unable to repay since, whereas the borrowers who repaid their loans largely completed their higher education in the 2000s. Borrowers with canceled loans are lower-income and more likely to be racial minorities than borrowers who repay their loans.

We then estimate the effect of cancellation on borrower financial wellbeing by comparing the borrowers whose loans were canceled to borrowers with similar pre-cancellation monthly payment obligations and whose loans were not canceled. We show that cancellation causes a 5 percentage point increase in the probability of being a homeowner two years after cancellation, a $1000 increase in balance on auto loans, and 5-10 point increase in credit score.

Our findings have several implications for evaluating alternative policies for ameliorating the burden of student debt:

• Student debt and secured loans (mortgages and auto debt) are substitutes on household balance sheets. Rather than enabling student borrowers to invest in their economic and social mobility, student loans block them from being able to do that until the balances are written off, after which affected borrowers can finally progress on their delayed economic life cycles.
• Comparing principal reduction (cancellation) to monthly payment adjustments (i.e., Income-Driven Repayment), only the former gives rise to household investment and asset accumulation. Payment adjustments serve to reduce delinquency, but they do not eliminate the economic burden of student debt, nor is IDR better “targeted” to distressed borrowers.
• Student borrowers whose loans are canceled are less privileged than borrowers who repay their loans, who are in turn less privileged than students who complete their education without having to take on student debt at all.
• The Great Recession was a disjunction between a previous regime in which most borrowers could make progress toward eventual repayment, versus the present one in which most student debt that is issued cannot reasonably be expected ever to be repaid.