Student Loan Pause Has Benefitted Affluent Borrowers the Most

A new report from the Brookings Institution, a left-leaning think tank, and authored by University of Virginia Professor Sarah Turner explains that the pause on student loan repayment—which has now been going on for over three years, since the onset of the COVID crisis—has benefited affluent borrowers the most. This isn’t a surprise to anyone familiar with the data on student loans, which shows that the largest debts are held by high earners. But might come as a surprise to voters who were sold this plan as helping a group of economically-needy Americans. There are borrowers who have struggled with student loan repayment in the past and more who will struggle in the future. But, yet again, the wildly and unnecessarily regressive solutions proposed by Democrats are being celebrated—leaving behind the neediest and most economically vulnerable Americans while paying dividends to an already-privileged class.

Like many of the democratic policy proposals on this issue, the pause suffers from an implicit misunderstanding in its design. The popular narrative on student debt would have you believe that more debt is necessarily bad: that borrowers with more debt are worse off than those with less. But it’s the opposite that’s actually true. We see that borrowers with low balances are often having the hardest time with their loan repayment while those will large balances repay their debts with relative ease. That’s because, on average, high loan balances are associated with higher earnings.

Large student loan balances are not less affordable than small balances for the same reason that large mortgages are not necessarily more burdensome than small ones. The burden of a small mortgage can easily be greater than the burden of a large one if the borrowers have low and high income, respectively. The affordability of any expense cannot be evaluated without also considering ability to pay.

That’s precisely the problem with so many of the proposals that have come from the left on student debt. The system isn’t perfect, far from it. But there are many borrowers who are very well served by the system. Any solution that attempts to provide relief (i.e., the repayment-pause, broad-based-cancellation, cutting interest rates) without regard for ability to repay will suffer from delivering benefits disproportionately to high earners (who tend to hold the largest balances.)

While many student borrowers go on to earn high wages that make repayment of their debt affordable, some will find that college doesn’t deliver for them financially, sometimes through no fault of their own. For example, many students don’t make it to graduation. Only two thirds of students starting a bachelor’s degree will finish it within 6 years. And unfortunately, credits but no degree don’t offer much in terms of enhances earnings opportunities that would make repayment of student debt affordable.

Going to college shouldn’t be a “make or break it” transaction. We rely on education after high school as a mechanism for social mobility and when it fails, which it inevitably will in some cases, it shouldn’t be the student borrower who carries the burden of that failure for their lifetime.

So, let’s stop with the need-blind solutions being put forward by Democrats and focus on real solutions for struggling borrowers. With the $195 billion we’re scheduled to spend on the student loan pause alone, we could have shored up the existing safety net to work better for seriously struggling borrowers and vastly expanded the resources we deliver through the Pell grant program (designed to offset the cost of tuition for the nation’s neediest students). The amount we’ll have spent by the scheduled end of the pause would have paid for several years of doubling the Pell grant for eligible students, which Biden campaigned on and stated as priority early in his administration.

A nuanced solution to the real problem of student loan unaffordability would simply improve the existing programs to support and relieve borrowers with low income relative to their payments due. That’s much less sexy than the ideas that Democrats have been selling on the campaign trail—which is probably also why it isn’t really on the table.

The fate of today’s student loan balances rests in the hands of the Supreme Court as they consider the legality of President Biden’s plan to cancel as much as $20,000 of debt per borrower. But this effort does nothing to stop more debt, even unaffordable debts, from accruing. At some point, lawmakers will need to get serious about nuanced reform that would protect borrowers from economic burden while allowing those who prosper to repay their debts to taxpayers.