Evaluating the Impact of Solid Student Loan Forgiveness



Executive Summary

  • The Biden administration is investigating whether it is eligible to grant a US $ 10,000 forgiveness in general student loan write-offs for each federal student loan.
  • Since the third quarter of 2020, more than 60 percent of federal student loan holders have deferred payments on their loans, up 47.8 percentage points from the previous quarter, while less than 1 percent of all borrowers are making payments regularly right now.
  • The $ 10,000 covered forgiveness will cut $ 380 billion in outstanding federal student loan debt, but more than half of that benefit will go to families with the wealthy 40 percent of income, while the poorest 40 percent will receive only a quarter of the benefit.
  • Blanket loan forgiveness would also introduce moral hazard to the federal student loan system and would likely flood the system with poorly designed and possibly fraudulent loans.


In the second quarter of 2021, more than 60 percent of federal student loan holders are on hold. Most of these students showed patience in the third quarter of 2020, when the Trump administration allowed federal student loan borrowers to suspend principal and interest payments in light of the pandemic. President Biden expanded this policy and even initially announced his support for a proposal to write off the $ 10,000 total student loan as part of his administration’s response to the COVID-19 recession. The administration has since dropped that commitment due to uncertainty about the president’s authority to grant full pardons for loans, but the administration is currently conducting a legal review to determine if the president has the authority to do so.

In the meantime, the Biden administration has canceled about $ 2.8 billion in outstanding federal student loans for an estimated 90,000 borrowers through more targeted and less controversial mechanisms. While this debt forgiveness still accounts for a relatively small fraction of total outstanding student debt, it has prompted speculation about what further forgiveness the Biden administration will ultimately provide, and when. This analysis examines the impact of a $ 10,000 universal student loan forgiveness for each federal borrower. While writing off $ 10,000 in outstanding student debt for all holders would reduce the total outstanding debt by $ 380 billion – nearly 25 percent – it would be highly regressive. More than half of this aid will be realized by the top 40 percent of income families, while the poorest 40 percent will receive only a quarter of this aid. In addition, any form of sheer loan forgiveness will also flood the already troubled student loan system with a new set of disbursements.

Suspension of student loan payments during COVID-19 pandemic

Repayment of federal student loans was initially suspended under the Coronavirus Relief, Aid and Economic Security Act (CARES), a $ 2.2 trillion economic stimulus bill in response to the economic downturn caused by COVID-19. adopted on March 27, 2020. in particular, it suspended the requirement to pay principal and interest on outstanding federal student loans and set zero interest rates on outstanding federal student loans. CARES also stopped collection of overdue federal student loans. These suspensions were optional; during this time, borrowers were able to make payments. The Trump administration has twice extended these suspensions for federal student loans until January 31, 2021. One of the first moves by the Biden administration was to extend these suspensions until September 31, 2021, which is the current renewal date. to pay federal student loan principal and interest.

Many borrowers took the opportunity to suspend payments of federal student loans last year. The proportion of federal direct student loan holders on hold increased from 9.6 percent in the second quarter of 2020 to 57.4 percent in the third quarter of 2020. The share of payable holders fell from 45.8 percent to just 0.8 percent in the third quarter of 2020. …

Chart 1: Distribution of Federal Direct Loans by Status[1]

It is beneficial for these borrowers to show leniency as they can temporarily refuse to repay in the hope of getting forgiveness from the Biden administration without any penalties. As of the second quarter of 2021, more than 57 percent of federal student loan holders are still on hold. Regular payments produce just over one percent.

Forgiveness under the Biden administration so far

The Biden administration initially pledged support in the form of a $ 10,000 pardon for all federal student loan holders. The administration has since abandoned this commitment due to uncertainty over whether it has the legal authority to do so. Meanwhile, amid growing calls for universal forgiveness, the administration has used more targeted mechanisms that are less controversial or controversial. The main one is “borrower protection,” which allows the Department of Education to repay loans to students who have been defrauded or misled by their institution of higher education. This facility also allows loans to be paid to students attending a school in violation of state or federal law.

So far, the administration has written off $ 2.8 billion in student debt for approximately 131,000 borrowers in three tranches:

  1. 1 billion dollars for 72,000 borrowers – through borrower protection;
  2. $ 1.3 billion for 41,000 borrowers with full and / or permanent disabilities; as well as
  3. $ 500 million for the 18,000 students who were defrauded by the ITT, also through borrower protection.

Overall, this forgiveness accounts for less than 0.002 percent of outstanding federal student loans (total $ 1.6 trillion in the second quarter of 2021) and just over 0.003 percent of borrowers (51.6 million student debt holders in the second quarter of 2021).

What a $ 10,000 Forgiveness Blanket Looks Like

Below is a table of the current federal student loan portfolio for outstanding balances of borrowers. A blanket pardon of $ 10,000 will completely eliminate balances for the 14.8 million holders in the first two tiers (in bold and underlined), while reducing each holder in subsequent tiers to that amount. Overall, a $ 10,000 universal forgiveness would cut the total federal student loan outstanding by $ 380 billion, which is 24 percent of the $ 1.6 trillion of total federal student loan outstanding debt.

Table 1: Federal Student Loan Portfolio by Borrower Debt as of Q2 2021[2]

High-income families have a disproportionate amount of student debt. According to the table below prepared by The federal reservemore than half of outstanding student debt belongs to families in the top 40 percent of the income distribution, while the bottom 40 percent of the income distribution accounts for about a quarter of total federal student loan debt. Of the roughly $ 380 billion in canceled debt under the $ 10,000 universal forgiveness proposal, more than half will go to families with incomes over 40 percent. The poorest 40 percent sell only a quarter of the $ 380 billion forgiven.

Chart 2: Distribution of Student Debt by Income Quintile[3]

Moral damage

Full loan forgiveness would also create moral hazard in the student loan system. Students will enter college with the thought that past forgiveness programs will be repeated. This assumption would reduce their incentive to pay off loans on time. If enough students held this view, the entire federal loan system would be awash with poorly designed and possibly fraudulent loans. And since taxpayers support federal student loans, forgiveness comes down to giving taxpayer-funded checks to every loan holder.


The current pause in repayment of federal student loans is due to end on September 30, 2021. The Ministry of Education is considering the possibility of extending the pause for next year. If that were the case, most likely most federal student loan holders would have remained patient until next year. The Ministry of Education is also likely to continue more targeted debt relief, using options such as borrower protection. This joint action will increase expectations that the Biden administration will ultimately provide full cancellation of student debt.

Complete forgiveness of a student loan would be a highly regressive policy. This will be a reward for the richest students and families. In addition, it will do it retrospectively, doing nothing to expand access to higher education, since current and future students will still have to pay the same tuition fees as before.

Better to use income-based repayment options. These options limit the monthly payments for loan holders and do not charge interest. They also have built-in options for forgiveness that discourage moral hazard. Such efforts will enhance the students’ ability to pay back their loans while avoiding the problems associated with unconditional forgiveness.

[1] Please note that the amount of interest will not be 100 percent because other payment categories have not been included for simplicity. These are the categories “in school”, “grace” and “other”.

[2] https://studentaid.gov/data-center/student/portfolio

[3] https://www.federalreserve.gov/publications/files/scf20.pdf


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