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Published: May 21, 2021 10 min read
Grad cap-shaped cage and a bird that has been freed from burden of debt
Kiersten Essenpreis for Money

Americans' collective student loan burden has nearly doubled in the past decade, topping $1.7 trillion this year. While everyone can agree that this causes problems, there's less agreement among policy experts, economists and the general public on what to do about it.

Enter: the debate over student loan forgiveness. The conversation has quieted while President Joe Biden's administration looks into whether cancellation without Congress's approval is legal. Biden has said multiple times that he supports modest debt forgiveness, ideally passed by Congress. But in the months since his election, advocates have repeatedly pressured him to go further and use executive authority to cancel $50,000 for every borrower.

The idea of broad student loan forgiveness has been around since at least the Occupy Wall Street protests a decade ago. But it didn't gain Main Street appeal in the Democratic party until after the 2016 presidential election, and the focus on the proposal has sharpened in the past year.

There are many ways — some clear and measurable, others anecdotal — that student debt has shaped a generation of students and their families. Yet wading through the arguments in favor of and against universal student loan cancellation requires analyzing competing narratives of who would benefit most from wiping out the debts of millions of Americans.

Here's a guide to the most common points from each side of the debate. Note: Here we are focusing on the proposal to forgive up to $50,000 in federal loans, which won't wipe out the entire $1.7 trillion outstanding, but is one of the most ambitious proposals under serious consideration.

The Case for Universal Student Loan Forgiveness

Advocates for student loan forgiveness have coalesced around issues of social justice, a failed higher education financing system, and the need for an equitable economic recovery in the wake of the pandemic. Here are their most common arguments:

Student loan forgiveness would stop the racial wealth gap from growing. Data showing the disparate effects student debt has on white students and Black students has been building for years. Here’s one of the most striking stats: Twenty years into repayment, the typical white borrower has paid off roughly 95% of their original balance, while the typical Black borrower has paid off just 5%. The upshot is that student debt is worsening the racial wealth gap among younger borrowers, and canceling a large mass of it would counter that.

It’s one of the few levers the executive branch can pull on its own.This is still up for legal debate (the Education and Justice departments are looking into it for the White House). But the argument goes like this: The Higher Education Act gives the Secretary of Education power to create, modify and cancel federal student debt. It’s a power that former President Trump and President Biden have already used by having the Education Department extend an interest-free payment pause during the pandemic. So, is canceling student debt the best way to address racial wealth inequality? Probably not. Will it solve all problems, like too many defaults and confusing repayment plans, within the student lending system? Definitely not. Is it one change that can be quickly and easily enacted? According to advocates, yes.

It would help with the economic recovery. College graduates, as a group, faired a whole lot better financially than people without a college degree during the upheaval of 2020. But that isn’t true of everyone who has student debt. In fact, the groups of borrowers who tend to struggle the most with their debt were also among those groups hit disproportionately hard by last year’s economic collapse, including people who borrowed for college but never earned a degree, and Black and Latino borrowers. Canceling student debt would put more spending money into millions of Americans' hands, while helping those populations recover from an unequal recession.

It would help borrowers build wealth. Even if borrowers are on the higher end of the earnings spectrum (which is true of college graduates in general), many say their debt makes it a challenge to turn those earnings into longer-lasting wealth, like saving for retirement or purchasing a home. In fact, more than half of all student loan debt is held by borrowers who have a zero or negative net worth. Canceling $50,000 worth of student loans per borrower would wipe out the entire debts of roughly 80% of federal borrowers, and millions of borrowers would move into positive net worth.

The Case Against Universal Student Loan Forgiveness

Opponents of canceling debt, including conservative analysts and some centrist liberals, tend to point out that student loan borrowers aren't a homogenous group. Some are struggling, yes; but many are doing just fine. Here's an overview of their case:

Wiping out student debt disproportionately helps the well-off. Because people who go to college tend to be from more well-off families than those who don’t attend, and people who graduate from college tend to earn much more over their careers than those without a degree, economists call universal debt cancellation a regressive policy, in that higher earners would get more of the total money spent on cancellation. Nearly a third of all student debt is held by the top 20% of earners, for example. Advocates say loan forgiveness is progressive, while opponents keep stressing how regressive it is. The analysis depends on whether you consider borrowers' income — which makes it appear regressive, since higher earners disproportionately benefit — or wealth — which makes it appear progressive, since it would boost the net worth of many borrowers and reduce the monthly burden of debt more for low-income borrowers.

It’s not a good economic stimulus. The best stimulus targets people who will go out and spend money immediately; thus, stimulating the economy. There are two reasons why debt cancellation isn’t the most efficient way to do that, opponents say. First, as noted above, a lot of the benefits would go to higher earners. And when higher earners get a cash windfall, they tend to save the money rather than spend it. The second reason is that, if the government cancels $50,000 of debt, it’s not writing you a $50,000 check. Instead, your cash windfall would be however much — say, $300 — you pay for your loans each month. It’s not that loan forgiveness wouldn’t have any stimulating effect on the economy, just that it wouldn't provide the biggest bang for the government's buck. An analysis from the Committee for a Responsible Federal Budget estimated that wiping out $1.5 trillion in student loans would likely boost economic output by $115 billion to $360 billion.

It’s unfair and risks creating a moral hazard. College graduates, even those with debt, tend to do better in a variety of measures than those who don’t have debt because they didn’t go to college. That’s a central argument for the opponents. Why do college-goers deserve this money more than adults who are struggling to earn a livable wage because they didn’t go to college? Why do people who haven’t paid off their debt deserve it more than people who scrimped and saved to either pay for their college out of pocket or to pay off their loans? And what happens to borrowers in the future; will they take out loans irresponsibly under the assumption that it's less risky because the government will do another sweeping round of forgiveness?

It does nothing to address the underlying problem. Those future student borrowers play a role in another common argument against cancellation: it does nothing to address the high cost of college or the fact that some college degrees don’t result in decent-paying jobs. If we wipe out all this debt today, the thinking goes, it will just start to grow again tomorrow.

Existing forgiveness options are already available, so a lot of debt is already on track to be canceled. Nearly all federal borrowers can already enroll in specific repayment plans that offer eventual forgiveness. If these plans worked perfectly, then in theory people wouldn’t default on their loans and repayment wouldn’t be a burden that holds borrowers back. The big catch? The system is a confusing maze for borrowers, who must jump through hoops to sign up and stay enrolled for a minimum of 20 years. Plus, debts often grow in these plans, adding to the psychological toll of feeling like your debt is inescapable. People who oppose universal debt forgiveness and instead suggest relying on these plans think that Congress should pass legislation focused on fixing the problems with these income-driven plans.

More from Money:

Would Student Debt Cancellation Shrink the Racial Wealth Gap?

Interest Rates on Federal Student Loans Are Set to Increase This Fall

Why You Need to Start Preparing Now for the Return of Student Loan Payments This Fall