Here’s how to craft a student loan forgiveness in a way that weeds out those who don’t need help

The Federal Reserve Bank of New York released new analysis on student loans on Thursday, with a blog post focusing on who would benefit from various approaches to canceling that debt — as well as the cost of each approach.

Forgiving a maximum of $50,000 per borrower would cost $904 billion and would forgive the entire balance to 79% of 37.9 million federal borrowers, with an average amount forgiven of about $24,000, according to the banknote. New York Fed, titled “Who Are the Federal Student Loan Borrowers and Who Benefits from Forgiveness?”

Adding a $75,000 household income limit would reduce the total cost of a $50,000 rebate policy to $507 billion, according to regional Fed Bank researchers. And having that same income limit but forgiving a maximum of $10,000 per borrower would cost $182 billion.

In addition to costing less, smaller student loan forgiveness policies would distribute a greater share of the benefits to borrowers with lower credit scores and to those living in less affluent, majority-minority neighborhoods, the authors found. of the item.

Comprehensive student loan forgiveness policies would benefit many borrowers who should have no difficulty repaying their loans.

Means testing, on the other hand, “would more directly target forgiveness to borrowers facing greater repayment difficulty, resulting in a significantly less regressive policy,” the post says.

For example, under a $10,000 policy, an income cap increases the share of canceled loan dollars going to borrowers in low-income neighborhoods from 25% to 35% and the share going to low-income borrowers. credit rating from 37% to 42%.

The low-income neighborhood effect is shown in the graph below.

New York Fed

The analyzes from the regional arm of the US central bank come after the White House said last week that it would again extend its pause for student loan repayments until August 31 – or finalize a recovery plan by then. cancellation of student debt. Analysts called the breaks a gambit for the midterm elections.

Additionally, the Biden administration on Tuesday announced a new review of its student debt portfolio, saying it will correct past mistakes that denied 3.6 million borrowers credit for loan forgiveness and will immediately cancel. the debt of about 40,000 borrowers.

The total outstanding balance of federally owned student loans stood at $1.38 trillion in December, according to New York Fed researchers.

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