Figure 3. Changes in median income and student debt, 2009 and 2019

5th April 2022

Figure 3. Changes in median income and student debt, 2009 and 2019

The nation's tax system invisibly subsidizes high-wealth households, who use Coverdell and 529 education savings accounts so that tuition functions as a tax-advantaged intergenerational transfer. For students with education debt, the IRS allows tax filers (married or single) to deduct up to $2,500 in student loan interest from their taxes each year. This means that borrowers with high debts will only be able to deduct a portion of their interest payments. According to our Brookings colleagues, four years after graduation, the average Black college graduate owes $52,726, compared to $28,006 for the average white college graduate. With federal interest rates between 2.75% and 5.3%, the average white household will be able to deduct their complete interest payment each year while the average Black household will not. The tax system prevents low-wealth, high-income households from ever catching up with high-wealth households.

Student debt cancellation is not regressive

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The most frequent argument against cancelling student debt is that it would be regressive: Because student debtors have college educations, they are better off than those who ostensibly didn't go to college. A variation on this claim is that higher-balance borrowers tend to have higher incomes. The former claim rests on a comparison of student debtors to those without student debt (and imputes incomes to each group), while the latter concerns comparisons between borrowers.

Neither claim is factual. First, having student debt does not entail that one went to college, let alone graduated. Many families assume student loans to contribute toward their children's and grandchildren's education; indeed, policy encourages this in the form of parent PLUS Loans, which institutions actively market to the parents of their enrollees.

Second, having student debt signifies that the debtor's family did not pay for college. More and more people are going to college, which means that the set of people who have student debt within that group increasingly consists of people who financed college themselves. For that reason, having student debt is now a marker of relative disadvantage, because it means the student's family did not pay their tuition.

Finally, proposals for student debt cancellation would cancel the majority of loans, for which the federal government is creditor. But a private market for student loan refinancing exists to offer generous terms to the most creditworthy borrowers. The borrowers who've refinanced out of the federal system are likely the highest earners and least likely to default-therefore, the beneficiaries of cancellation would be the lowest-income subset of student loan borrowers.

The other half of the claim-that student loan balances, in dollar terms, correlate positively with income-is true in a static sense, but it does not mean that cancelling student debt is regressive. Figures 3 and 4 below show the relationship between loan balance and census tract median income in a cross-section of student loan borrowers in both 2009 and 2019. (We do not observe the income of debtors specifically, so we impute it based on the median income in the neighborhood where they live.) They show that loan levels are growing rapidly, and student debt as a share of income is highest-and growing fastest-in the lowest-income areas.

Figure 4. Student debt-to-income ratio by income

That is why the claim that student debt cancellation is regressive is false. We measure regressivity in relationship to income (or wealth), not to raw dollar amount. The latter metric would mean that Social Security is a regressive social program since it pays out higher benefits to higher-income beneficiaries, and that consumption taxes are progressive because higher-income consumers spend more dollars on their consumption. Of course, Social Security is widely and correctly credited as the federal program that does the most to reduce poverty, and consumption taxes are canonically regressive taxes, because poorer people expend a larger share of their income on consumption and save little. Because loan balances as a share of income are highest for lower-income borrowers-and so much higher as to be negative for low-wealth borrowers (many of whom have negative balance sheets thanks to student debt)-cancelling student debt would make the income and wealth distributions more egalitarian and nearly eliminate negative net worth households from the wealth distribution. That is the definition of a progressive-not regressive-program.