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Report Says Democrat Student Loan Forgiveness Plan Would Benefit the Wealthy

Report Says Democrat Student Loan Forgiveness Plan Would Benefit the Wealthy

“roughly 60%, is held by the top 40% of income earners”

Democrats are pushing hard for this, but it never gets framed as a gift to the wealthy.

The Washington Examiner reports:

Democratic student loan forgiveness plan primarily benefits top earners

Sen. Chuck Schumer and other congressional Democrats have called on President Biden to cancel as much as $50,000 in federal student loans, but economists warned that such proposals primarily benefit those who are already well-off.

Citing a record $1.68 trillion national student loan balance, Democrats on Thursday urged Biden to use an executive order to forgive student loans, which Schumer called “a huge anchor on our entire economy.”

“There’s very little that the president could do with a flick of a pen that would boost our economy more than canceling $50,000 of student loans,” Schumer said when he announced the resolution, which would forgive all debts for 36 million people, or roughly 80% of all student loan borrowers, according to CNBC.

But a report from the Federal Reserve released in September 2020 found that the majority of student loan debt, roughly 60%, is held by the top 40% of income earners, who account for about three-quarters of all loan payments. The lowest-income earners hold less than 20% of all federal student loan debt by comparison.

“Somehow, people think of people with student debt as among the least well-off, most struggling people in our society, but that’s just not true,” Sandy Baum, a nonresident senior fellow at the left-leaning Urban Institute, told the Washington Examiner.


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There is always a “moral hazard” component to a public bailout program such as this. Almost every student loan borrower did it voluntarily and understood the terms of the loan. (The argument is that they did not understand the economic value of the education that they received.)

In a normal loan that is dischargeable in bankruptcy, if the borrower gets too far under water, he can declare bankruptcy, and all of his creditors, including the US government get a fair shot at his assets. People who borrow too much are more likely to declare bankruptcy, so lenders have a motive to refrain from making more loans than a borrower can handle.

Because student loans are not dischargeable in bankruptcy, lenders have no incentive to refrain from over-burdening student borrowers, and the federal government guarantees student loans from loss. When a borrower with student loans files for bankruptcy, the student loan is not treated equally with loans from other creditors.

When we bail-out student loans, by definition the “first dollar” of bail-out will help disproportionately, the borrowers who are in the least debt and need the least help. The only way around this is to come up with a plan that says, “We will forgive 5% of your total student loan debt” so that people who borrow the most will receive the most loan forgiveness. If you forgive too large a percentage of loan debt, you will create a moral hazard.

    henrybowman in reply to lawgrad. | February 8, 2021 at 12:48 am

    You write as if the creation of new gibs were subject to any rational economic analysis at all.
    Bread. Circuses. That is all that matters, and all that needs to matter.

The Democrat Party, despite its self-congratulatory rhetoric, is and always has been the party of the rich.