Measuring the Effects of Loan Forgiveness

Borrowers whose private student loans were discharged in court earned more, paid off other debt and were more likely to move for work, new research shows.

September 23, 2019
 
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The impact of student loan forgiveness goes far beyond a reduced debt balance for borrowers, according to a new study.

Researchers from Harvard Business School, Indiana University and Georgia State University examined the effects of debt cancellation for borrowers whose private student loans were tossed out in court after their creditor, National Collegiate Student Loan Trusts, couldn’t prove the chain of title. In recent years, judges have tossed out numerous lawsuits against student borrowers because National Collegiate couldn't establish in documents that the company actually owned the debt.

The study found that the borrowers saw a boost in income, were more likely to move and lowered their debt balance outside of student loans. Private student loans typically are taken out by students at private institutions, and the researchers focused on borrowers in default.

“They got in better financial shape after their loans were dismissed. And their increased mobility means they have additional opportunities for higher-paying jobs,” said Marco Di Maggio, an associate professor of business administration at Harvard Business School and one of the researchers who conducted the study.

The potential benefits of student debt cancellation have received more attention recently in part thanks to campaign proposals from Elizabeth Warren and Bernie Sanders to cancel student loan debt. Warren has proposed canceling up to $50,000 in debt for each student borrower, and Sanders has called for wiping out all student debt.

The research on the National Collegiate loans underlines the potential impact of canceling even small amounts of student debt.

Borrowers who were analyzed for the study received an average of about $10,000 in loan relief. As a result, they were less likely to default on all kinds of debt, including credit cards, auto loans or mortgages, the researchers found.

They also earned significantly more -- about $3,000 annually -- after receiving debt relief. Di Maggio said borrowers’ efforts to find better jobs are less impaired by employer credit checks. They are also more likely to pursue higher-risk opportunities without debt obligations hanging over them. And if borrowers aren’t seeing wages garnished to pay for student loans, they have more incentive to look for better-paying work, he said.

The effects observed in the study likely would be even bigger if large amounts of federal student loan debt were canceled, DiMaggio said.

The debate over debt cancellation plans has focused on the equity of those proposals as well as the price tag. Warren’s debt relief proposal would cost an estimated $2 trillion and be paid for with a new wealth tax. Sanders’s plan would cost a projected $2.2 trillion and be offset by a new tax on financial transactions. Di Maggio said the research doesn’t assess those costs but shows what can be accomplished with similar policies.

Researchers have debated whether large-scale debt cancellation plans would be progressive or distribute a disproportionate share of benefits to higher-earning borrowers.

Julie Margetta Morgan, a fellow at the Roosevelt Institute, said the study shows that student debt has to be seen as part of a larger balance sheet for many individuals.

“Higher ed experts tend to think about student debt in isolation. But it’s part of a larger web of burdens on borrowers,” she said. “Removing this one burden has downstream effects.”

Tamara Hiler, director of education at the think tank Third Way, said the question isn’t whether debt forgiveness would free borrowers from financial burdens due to student debt.

“The big question on the table is whether this is the best use of money given limited resources, especially given that blanket debt forgiveness benefits wealthier students,” she said.

James Kvaal, president of the Institute for College Access and Success, said student loans still pay off over all. But federal policies need to do a much better job of identifying students “who aren’t going to be able to repay their debt and help them get out from underneath it," he said. “That includes students who were cheated by their colleges, and it also includes students who took out a lot of debt for low-quality programs.”

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