Here's what student debt forgiveness would look like for borrowers and the U.S. government

Aarthi Swaminathan
·Reporter
·6 min read

Dave Osborne, 72, is currently making a nearly $700 monthly payment to Sallie Mae to pay down $55,000 in private student loans while living in retirement in Akron, Ohio.

Osborne, having co-signed on loans taken out by his grandson to fund his college education, started paying the recurring debt payment as his kin struggled with employment amid the coronavirus pandemic.

“Obviously, it’s put a strain on our relationship,” the former school administrator told Yahoo Finance. “If we didn’t pay [the lenders] our credit, everything related to us would have suffered.”

The Osbornes — who still owe more than $49,000 on the private loans — are among 44 million U.S. borrowers who are grappling with the decision made by themselves or members of their family to pursue higher education. (Roughly $140 billion or 9% of $1.54 trillion student debt held by Americans is from private loan servicers.)

And as the Biden administration considers cancellation of federally-backed student debt, which likely wouldn’t help Osborne but would affect millions, Yahoo Finance spoke with experts to understand how various levels of forgiveness would affect borrowers and cost the U.S. government.

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Cancel $5,000

Beth Akers, a senior fellow at the Manhattan Institute, recently advocated for $5,000 in debt cancellation in a Wall Street Journal op-ed.

“We see in the data that the highest rate of student loan default is among people who have very small balances,” Akers explained in an interview with Yahoo Finance.

The $5,000 cancellation could be implemented not only by Federal Student Aid (which holds the student loan portfolio), according to Akers, but also through a “one-time tax credit.” In other words, the forgiveness would function similar to a stimulus check.

And canceling $5,000 would erase the total debt balance of 19% of borrowers as well as 13.8% of the government’s $1.5 trillion debt portfolio, according to expert estimates analyzed by Yahoo Finance (above).

Compton Early College High School graduating students wait after picking up their diplomas in a parking lot during a drive-thru graduating ceremony, during the outbreak of the coronavirus disease (COVID-19) in Compton, California U.S. June 10, 2020. REUTERS/Mario Anzuoni
Compton Early College High School graduating students wait after picking up their diplomas in a parking lot during a drive-thru graduating ceremony, during the outbreak of the coronavirus disease (COVID-19) in Compton, California U.S. June 10, 2020. REUTERS/Mario Anzuoni

Furthermore, a cancellation of $5,000 of federally-backed debt across the board would benefit low-income households, many of whom hold relatively low but still burdensome amounts of debt.

We don't want to live in a society where there are people who are living in dire circumstances,” Akers said. “So my feeling is that if this is structured correctly so that the benefits are delivered really to people who are actually struggling and not just people who would like to have their debt relieved, then we get away from that a bit.”

Cancel $10,000

Going up to $10,000 in forgiveness, “you're going to reach a lot more borrowers that are at significant risk of default,” Antoinette Flores, director of postsecondary education at the Center for American Progress (CAP), told Yahoo Finance. “We know that the majority of borrowers who ended up defaulting have debt below $10,000.”

Minority student loan borrowers, in particular, would benefit from a $10,000 cancellation: A CAP analysis found that across all races, Hispanic or Latino borrowers were most likely to hold less than $10,000 in student debt, followed by Black or African American students.

An Urban Institute analysis of the 2021 student loan cohort shows that borrowers with lower levels of debt are more likely to default. (Urban Institute)
An Urban Institute analysis of the 2021 student loan cohort shows that borrowers with lower levels of debt are more likely to default. (Urban Institute)

Furthermore, according to the CAP analysis, $10,000 in cancellation would completely wipe out debt for 35% of Latinx borrowers, as compared to 30% of white borrowers and 28% of Black borrowers at a cost of roughly $371 billion for the U.S. government.

“We have put racial equity at the forefront of this analysis because it is at the forefront of this issue,” Louise Seamster, a student loan researcher and assistant professor at the University of Iowa, tweeted a few weeks ago. “[T]he old exclusionary system is replaced by a single system that produces separate and unequal results for Black and white Americans. this is the crux of predatory inclusion.”

Cancel $50,000

To truly fix the system, according to Seamster, the cancellation of loans would have to be at least $50,000.

Democratic Senators Elizabeth Warren (D-MA) and Chuck Schumer (D-NY) both called for forgiveness on $50,000 of federally-backed student debt across the board, which would erase the total balances of 80% of borrowers and nearly 70% of the government’s student debt portfolio.

The cost of forgiving $50,000 across the board would be at least a trillion dollars. One major drawback, some experts argue, is that many borrowers holding high levels of debt are those with advanced degrees who are not low-income. That cohort is less in need of student debt forgiveness.

WASHINGTON, DC - JULY 23:  Sen. Elizabeth Warren (D-MA) speaks during a press conference on Capitol Hill July 23, 2019 in Washington, DC. Warren spoke with Rep. Jim Clyburn (D-SC) on legislation to cancel student loan debt for millions of Americans.  (Photo by Win McNamee/Getty Images)
WASHINGTON, DC - JULY 23: Sen. Elizabeth Warren (D-MA) speaks during a press conference on Capitol Hill July 23, 2019 in Washington, DC. Warren spoke with Rep. Jim Clyburn (D-SC) on legislation to cancel student loan debt for millions of Americans. (Photo by Win McNamee/Getty Images)

‘We need to rethink how we fund higher education more generally’

In any case, as student debt expert Kevin Carey argued recently, cancellation isn’t going to bring down the cost of higher education.

“We need to rethink how we fund higher education more generally,” Seamster said. “The landscape has transformed and this means that our old understanding of how much education costs and what it did for you no longer applies.”

Osborne, whose private loans would likely not be touched by any first round of forgiveness, noted: “There's got to be literally thousands of grandparents that are in the same situation, that they co-signed on loans, assuming that they’re doing this as a fallback if necessary but expecting the grandchild to go to school and get a job and pay on the loan.”

Data on grandparents co-signing loans is not easy to find, but one analysis of Department of Education data found that 18% of federal student loans are so-called Parent PLUS loans.

A recent WSJ analysis of newly-released data from ED also revealed that at nearly 150 colleges, parents have taken out more than $50,000 in loans.

“He's now at work with a good company,” Osborne said of his grandson, “and assuming he keeps the job and all works out well, then I know he will try to pick up on his loans.”

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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