New research suggests borrowers whose loans were canceled were less well-off than those still paying
On his way out of office, President Joe Biden touted his record on student-debt cancellation, noting that his administration approved nearly $190 billion in student-debt relief for more than 5 million borrowers.
It's still too early to get a full picture of who received the relief and the impact it's had on their lives. Tens of thousands of those borrowers had their debt forgiveness approved in the waning days of Biden's presidency, and many others are still waiting for their loans to actually be wiped out.
But new research suggests that borrowers who had their debt forgiven were worse off financially at the time of cancellation than those who didn't receive the benefit. In addition, getting rid of the debt freed them up to buy homes and use credit for other big purchases, like cars.
The findings, which were published Sunday, are based on an analysis of nationally representative credit-panel data led by economists at the Jain Family Institute, a nonprofit research organization. The research "counters the popular narrative that the student-loan cancellation is a giveaway to the most well-off borrowers," said Marshall Steinbaum, a senior fellow at the Jain Family Institute and an economist at the University of Utah.
For years, the idea that a large student-loan balance is a sign that you received a lot of education that provided a benefit in the labor market has made even some supporters of debt cancellation put limits on the amount wiped out. But to Steinbaum, the findings suggest that "having more student debt isn't a sign that you're very well-off."
"The people who do have their student loans cancelled, this clearly lifts a significant financial burden," he said. "The idea that student debt buys you economic well-being, that's not true."
In announcing plans in 2022 to cancel student debt for a wide swath of borrowers, Biden acknowledged that the promise of loans to finance education in a way that would improve a borrower's financial life had broken down.
"An entire generation is now saddled with unsustainable debt in exchange for an attempt, at least, at a college degree," he said. "The burden is so heavy that even if you graduate, you may not have access to the middle-class life that the college degree once provided."
Ultimately, Biden's efforts to cancel up to $20,000 in student debt for roughly 40 million borrowers were blocked by the Supreme Court. But his administration did have success streamlining borrowers' access to debt-relief programs that existed under the law before he took office.
These 5 million borrowers who had debt relief approved fell into a few categories: They were scammed by their schools; worked in public service and paid down their loans for at least 10 years; were severely disabled; or were borrowers who had been in repayment for at least 20 years.
Borrowers who had their loans cancelled between 2021 and 2024 saw a 1.5-percentage-point increase in homeownership, on average, than if their debt hadn't been wiped out. By three years after cancellation, that increase went up to 8 percentage points. In addition, their credit scores went up an average of 19 points and they took on $756 more in auto debt.
To figure out the impact of the cancellation, the researchers compared these borrowers to a control group who were still paying their loans. Because the cancellation took place during the pandemic-era payment pause on student loans, the researchers wanted to isolate the impact of the debt relief from the pause. To do that, they compared borrowers who had their debt wiped out to a control group of borrowers who were still making payments on a student loan (either private or federal) during the pause.
They found that while all cohorts benefited from the cancellation, different groups experienced it differently. The credit data doesn't include information about why borrowers had their loans wiped out, but the timing of the relief provides some indication.
The earliest cohort experienced the biggest increase in homeownership following cancellation. Given the timing, this group was likely made up largely of borrowers who received relief through borrower defense; that program allows borrowers to have their debt cancelled if they've been scammed by their schools.
"Relieving their burden was comparatively significant, even though the amounts cancelled were probably the lowest," Steinbaum said. That's because these borrowers likely weren't receiving much of a labor-market benefit from their education.
With Donald Trump set to become president Monday, many borrowers and advocates are anxious about the future of these cancellation initiatives. Steinbaum and other experts have noted that many proposals to curtail debt relief would only impact future borrowers - meaning that despite the political debate surrounding student-loan forgiveness, it's likely we'll see more cancellation down the line for borrowers who are already in certain programs.
Steinbaum's previous research has indicated that in 2022, nearly 54% of outstanding student loans had a higher balance than they did when the borrower took on the loan.
"There are still a lot of loans out there that are never going to be repaid," Steinbaum said.
-Jillian Berman
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.