The Intersection Of Student Loans And Taxation - Andre M. Perry, Andre M. Perry Senior Fellow - Metro @andreperriedu Marshall Steinbaum Marshall Steinbaum Senior Fellow - Higher Education Finance, Jain Family Institute Assistant Professor of Economics - University of Utah @econ_marshall Carl Romer Carl Romer - Former Metropolitan Research Assistant Policy Program @_cromer043
In case you missed it, check out the June 28 webinar with a panel of experts discussing the effects of student debt cancellation.
The Intersection Of Student Loans And Taxation
"No matter what you want to do with your life, I guarantee you you're going to need an education," President Barack Obama said in a 2009 national address to college students. middle class is to get a college degree.
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But a college degree does not eliminate the income gap between white and black workers. Black students finance their education through debt, and thus college degrees actually add to the fragility of the upwardly mobile black middle class. And because education does not achieve income parity for black workers, the disproportionate debt black students take on to finance their education reinforces the racial wealth gap. Today, the average white family has approximately 10 times the wealth of the average black family, while white graduates have over seven times the wealth of black graduates.
Most analysts believe there is a student debt problem in the United States, and even conservative scholars acknowledge that some debt must be forgiven. Tuition outpaces students' ability to pay, and the share of students taking out loans to finance their degrees rose from about half (49%) to more than two-thirds (69%) from 1993 to 2012, according to the Pew Research Center. Between 1993 and 2020, the average loan amount nearly tripled, surpassing $30,000.
Past discrimination should compel researchers and practitioners to seek solutions to the student debt crisis centered on the Black experience. The black-white wage gap is worsening, while the indebtedness of black communities is increasing. If we can create systems that recognize these lived experiences, we can create fairer outcomes for all.
Disagreement over the extent of the student debt problem tends to center on the positive correlation between educational attainment and income. Scholars who downplay the problem of student debt tend to assume that the relationship is causal and that student borrowers are generally able to pay off their loans from the higher incomes they financed through their borrowing. However, too much focus on income can lead researchers to mistakenly assume that people with similar incomes have the same ability to repay student loans.
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Regardless of the income they earn after graduation, black households carry more student debt, which reduces their creditworthiness. Not surprisingly, then, blacks with a college degree have a lower rate of homeownership than white high school dropouts. Furthermore, research by the Federal Reserve Bank of St. Louis finds that after college graduation, whites receive wealth transfers from their families to help pay for things like buying a home. On the other hand, black households transfer their increased earnings after college to help their families. Different patterns of intergenerational transfers contribute to the fact that nearly three-quarters of black borrowers' student loans today have higher balances than they originally did.
The state tax system invisibly subsidizes wealthy households, who use Coverdell and 529 education savings accounts, so that tuition works as an intergenerational transfer with more favorable taxes. For students with education debt, the IRS allows taxpayers (married or single) to deduct up to $2,500 of student loan interest from their taxes each year. This means that borrowers with high debt will only be able to deduct a portion of their interest. According to our 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 its entire interest 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.
The most common argument against canceling student debt is that it would be regressive: because student debtors have a college education, they are better off than those who supposedly didn't go to college. A variation on this claim is that borrowers with higher balances tend to have higher incomes. The first claim rests on comparing student debtors with those without student debt (and imputing income to each group), while the second concerns comparisons between borrowers.
Neither claim is factual. First, student debt doesn't mean someone went to college, let alone graduated. Many families take out student loans to contribute to the education of their children and grandchildren; indeed, policy encourages it in the form of PLUS loans for parents, which institutions actively market to parents of their enrollees.
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Second, student debt means that the debtor's family did not pay for college. More and more people are going to college, which means that the group of people with student debt within that group is increasingly made up of people who financed college themselves. For this reason, student debt is now an indicator of relative deprivation, as it means that the student's family has not paid tuition.
Finally, the student debt relief proposals would cancel most of the loans owed to the federal government. But the private student loan refinancing market exists to offer generous terms to the most creditworthy borrowers. Borrowers who refinanced from the federal system are likely to have the highest earnings and the least likely to default—therefore, cancellation beneficiaries 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 that doesn't mean student debt cancellation is regressive. Figures 3 and 4 below show the relationship between loan balance and census tract median income across student loan borrowers in 2009 and 2019. (We don't look at borrowers' income separately, so we impute it based on the median income of their neighborhood.) They show that loan levels are rising rapidly, and student debt as a share of income is highest — and growing fastest — in the lowest-income areas.
That's why the claim that student debt relief is regressive is incorrect. We measure regressivity in terms of income (or wealth), not raw dollar amount. The latter metric would mean that Social Security is a regressive social program because it pays 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 spend more of their income on consumption and save less. Because loan balances as a share of income are highest for lower-income borrowers — and so high as to be negative for low-asset borrowers (many of whom have negative balances thanks to student debt) — canceling student debt would generate income and the distribution of wealth is more egalitarian and it almost eliminates negative net rich households from the wealth distribution. That is the definition of a progressive – not a regressive – program.
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The picture of who has student debt is further detailed by looking at a cross-section of income, loan amount and likelihood of borrowing. Figure 5 below shows the number of borrowers by outstanding balance by census tract median income. Figure 6 shows total loan balances by census tract median income—that is, what amount of total outstanding debt is held by borrowers with a given total balance who live in a given income area?
The claim that student debt cancellation is regressive tends to be followed by pointing out that a large number of borrowers have a small amount of debt, and a relatively small number of borrowers carry a large portion of the total debt burden. That's true, but the unspoken implication is that the small number of high-balance borrowers who would benefit most from foreclosures also have higher incomes.
That implication is false. Much of the outstanding debt is held by higher-net-worth borrowers who live in census tracts where the median income is between $20,000 and $40,000. Meanwhile, high-income census tracts account for very few borrowers, suggesting that better-off people are less likely to have student debt. The claim that student debt cancellation is regressive rests on a misunderstanding of who has student debt and who has how much student debt. It grossly overinterprets the positive cross-sectional correlation between loan balances and income, and misunderstands the definition of regressivity in the first place.
There's another good reason to cancel student debt: For many borrowers, it will never be paid back. In fact, current policy encourages default while failing to address its implications. That's why
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