Bills
| 3.23.22

Should Student Loan Borrowers Making Under $100k Receive Student Loan Forgiveness? (S. 2235)

Do you support or oppose this bill?

What is S. 2235?

(Updated June 27, 2021)

This bill — the Student Loan Debt Relief Act of 2019 — would cancel $50,000 in student loan debt for every person with a household income under $100,000. For people with household incomes over $100,000 a year, this bill would use an income-based calculation to determine the amount of loan cancellation they’d receive (see below for more details), up to people with household incomes above $250,000 (who’d be ineligible for any student loan debt cancellation). This loan forgiveness would be eligible for student loan debt held by both student and parent borrowers. If enacted, this bill would offer student loan debt forgiveness for over 95% of borrowers and eliminate student loan debt altogether for over 75% of Americans with student loan debt. 

Specifically, this legislation would: 

  • Cancel $50,000 in student loan debt for every person with household income under $100,000 (with calculations based on households’ income from the most recent tax year).
  • Make private student loan debt eligible for cancellation through conversion to federal loans.
  • Streamline the student loan debt forgiveness process using data and income information already available to the federal government at the Treasury Dept., Internal Revenue Service (IRS) and Dept. of Education, so there wouldn’t be any paperwork involved in getting student loan debt cancellation.
  • Provide a year-long freeze on the collection of student loan payments and fees from borrowers through wage garnishment, tax return seizure, and Social Security garnishment by the federal government on troubled loans, as well as interest accrual on student loans, while this bill is being implemented.
  • Allow borrowers to discharge student loans in bankruptcy.
  • Not treat canceled debt as taxable income.
  • Repair the credit of defaulted borrowers who have their loans discharged.
  • Automatically refinance existing student loan rates to lower interest rates specified in the Bank on Students Emergency Loan Refinancing Act (S.768 / H.R.1707).

There are phase-outs to this bill’s loan forgiveness based on income: 

  • Borrowers with a household income about $250,000 (the top 5% of earners) wouldn’t be eligible for any student loan debt cancellation; and
  • The $50,000 cancellation amount would phase out by $1 for every $3 in income above $100,000 (e.g., a person with a household income of $130,000 would get $40,000 on cancellation and a person with a household income of $160,000 would get $30,000 in cancellation).

For borrowers with multiple loans, the Dept. of Education would void the loan with the highest interest rate or outstanding balance. Parent PLUS loans would also be eligible for cancellation.

Argument in favor

Student loan debt is a major crisis in the U.S. that’s holding many borrowers back from economic security, starting families, pursuing homeownership and more. Forgiving all student loan debt for the most burdened borrowers would give them the freedom to pursue their financial dreams.

Argument opposed

This bill would be incredibly expensive, and it’s unclear whether the proposed funding mechanism — a wealth tax on ultra wealthy Americans — would be enough to cover it. Furthermore, this legislation doesn’t address the real cause of student loan debt: soaring college tuition. In fact, it may exacerbate that problem.

Impact

Student loan borrowers; student loan debt; holders of student loan debt; securers of student loan debt; student loan debt creditors; Treasury Dept.; IRS; and Dept. of Education.

Cost of S. 2235

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sen. Elizabeth Warren (D-MA), a candidate for the 2020 Democratic presidential nomination, introduced this bill to cancel student loan debt for millions of Americans: 

"My very first bill when I got to the Senate was legislation to tackle the growing student debt crisis because I was sick of Washington allowing the wealthy to pay less, while burying tens of millions of Americans in mountains of student loan debt. Since then, Washington has only allowed this crisis to get worse-especially for people of color. Enough is enough. Congressman Clyburn and I have a bill to cancel student debt for millions of Americans and finally end this crisis."

Sen. Warren argues that this bill would provide an economic stimulus to the middle class to increase home purchasing and help start small businesses. She also contends that it’s an investment in the future, saying in June 2019: 

“The student debt crisis is real and it’s crushing millions of people -- especially people of color. It's time to decide: Are we going to be a country that only helps the rich and powerful get richer and more powerful, or are we going to be a country that invests in its future?”

In separate comments, Sen. Warren explained the rationale for the income caps, which are meant to “get the maximum help to the people who will jhelp close that black-white wealth gap.”

House Majority Whip James Clyburn (D-SC), sponsor of this bill’s House companion, says: 

"Crushing student debt has reached crisis levels in America requiring big, bold solutions. I'm proud to be working with Senator Warren to provide most student loan holders relief from this daunting burden and make amends for the failure to ensure that higher education is accessible and affordable to all. Post-secondary education should be the springboard to enable students to achieve their dreams not the impediment that prevents the realization of those goals."

The American Federation of Teachers (AFT) is among a number of education and consumer advocacy groups that has expressed support for this bill. Its president, Randi Weingarten, says: 

“The cost of a college degree is pauperizing an entire generation, and the current debt relief programs in place are being sabotaged by a deeply flawed and broken system that protects loan company profits at the expense of borrowers. The Student Loan Debt Relief Act is one welcome solution that would give the current generation a chance at financial health upon graduation, regardless of what professions they choose. This bill would release millions of borrowers from their 'debt sentence' so they can live their lives, care for their families and have a fair shot at the American dream."

Sen. Amy Klobuchar (D-MN), who is also seeking the 2020 Democratic presidential nomination, called student debt cancellation “unrealistic” in a CNN town hall at St. Anselm College in Manchester, New Hampshire in April 2019. Noting that there’s $1.5 trillion in student debt and saying she couldn’t support proposals to offer free college tuition or forgive student debt because they’re unrealistic, she said: 

“I wish I could staple a free college diploma under every one of your chairs—I do. Don’t look. It’s not there. I wish I could do that but I have to be straight with you and tell you the truth.”

However, Sen. Klobuchar did express support for allowing students and former students to refinance students at a lower rate (below 3% or even lower), proposed expanding Pell Grants and suggested bringing back President Obama’s proposal to make community college free.

Critics of this proposal and those offered by other Democratic presidential nominee hopefuls argue that top earners would find their way around the wealth taxes they propose using to pay for these bills. If this happened, these proposals would add to the growing national deficit.  Other critics of this proposal say they don’t support policies that benefit the children of billionaires. 

Yet other critics of mass debt cancellation argue that these proposals would benefit well-off Americans the most, as the people who take out the largest loans do so to pay for expensive graduate degrees that help them eventually earn higher salaries (which make them more able to pay debts back). Similarly, the Brookings Institute found that Sen. Elizabeth Warren’s (D-MA) student debt forgiveness proposal, which is less generous than this legislation owing to its tapering off of benefits for high-income earners, would be regressive — a finding that would apply even more acutely to this bill.

There’s also some debate over what universal debt cancellation would do to the racial wealth gap. One 2015 analysis by Demos, a left-leaning think tank, found that eliminating all student debt per this plan would increase the wealth gap between white and black households. In 2018, the Roosevelt Institute’s Marshall Steinbaum estimated that it would narrow. Steinbaum found that in the absence of student debt, the current 12:1 ratio between the average median wealth of white versus black households would decrease to 5:1. fIn a 2018 study, the Levy Institute found that universal student debt cancellation could raise GAP by $108 billion annually and add up to 1.5 million jobs a year over a 10-year period. 

In response to these concerns, Marshall Steinbaum, an economics professor at the University of Utah and co-author of a 2018 paper from the Levy Economics Institute at Bard College calling for the federal government to wipe away all $1.5 trillion in federal student loan debt, argues that claims that student debt cancellation proposals are regressive underestimate the extent to which lower-income borrowers increasingly struggle to manage their student loans. He adds that such arguments also rely on outdated views of who holds student loan debt when it’s increasingly the case that a college degree is required to compete for good-paying jobs. Steinbaum says: 

“Having student debt used to mean you were relatively privileged. Now it's the case that having student debt, at least among younger cohorts, means you're relatively deprived." 

Some economists also argue that wiping out student loan debt on a wide scale could contribute to the ever-rising cost of college if students take loans out expecting debt forgiveness down the line, and already-pricey colleges wouldn’t have any incentive to keep costs down. The conservative-leaning Manhattan Institute’s Beth Akers says, “If we get into a system where people anticipate that their loans will be forgiven in the future, I think we're only going to see [the problem of expensive college tuitions] exacerbated.”

Mary Clare Amselem, an education policy expert at the Heritage Foundation, echoes Akers’ concerns. She argues that both Sen. Warren and Sen. Bernie Sanders (I-VT), who has proposed universal student debt cancellation (see below for more information), are focusing on the wrong end of the problem. Amselem argues that the federal government, through its student lending, has played a significant role in driving tuition costs up, and that policymakers’ focus should be on driving tuition prices down, possibly through private-market reforms. She also stresses that it’s important to provide alternatives for those whose careers don’t warrant going to college, or whose financial situations may prevent them from pursuing four-year degrees.

Richard Hunt, president and CEO of the Consumer Bankers Association, also criticizes this bill, saying it’s “short-term, short-sighted and comes up short in every way except its cost to taxpayers.” 

This legislation doesn’t have any Senate cosponsors. Its House companion, sponsored by Rep. James Clyburn (D-SC), has eight Democratic House cosponsors.  It’s also endorsed by a range of higher education, labor, consumer advocacy and progressive groups, including the AFL-CIO, Progressive Change Campaign Committee, HBCU Collective, Americans for Financial Reform and the Southern Poverty Law Center.

Sen. Bernie Sanders (I-VT) and Rep. Ilhan Omar (D-MN) have introduced bicameral legislation, the Student Debt Cancellation Act of 2019, that would direct the Dept. of Education to cancel all student loans taken out since 1965. Their bill would go a step further than this legislation by making debt cancellation universal, rather than based on earnings.

Neither this nor Sen. Sanders’ bill are likely to pass the Republican-controlled Senate or be signed by President Trump in the current Congressional session. Higher education expert Mark Kantrowitz also believes it’ll have difficulties getting through the Democrat-controlled House once they look at its cost.


Of Note: Student loan debt has surpassed credit card and auto debt to become the second-highest consumer debt category, topped only by mortgages. The average college graduate leaves school with $30,000 of debt (versus $10,000 in the 1990s). Additionally, 28% of student loan borrowers are in delinquency or default. 

The New York Fed Reserve reports that over 7.8 million borrowers (17% of all student debtors) own $50,000 or more on their student loans. The average debt load of those who completed a master’s of education degree from 2015-16 was $55,200; for a master of science, it was $62,300. And of those pursuing any kind of advanced degree, Black and Latinx graduates are the most likely to have borrowed $50,000 or more. As of 2014, 13% of parents with Parent PLUS loans owed over $50,000 and 4% owed over $100,000.

In its summary of this bill, Sen. Warren’s office cites an independent economic analysis finding that this legislation would substantially reduce both the Black-white and Latinx-white wealth gaps while increasing Black and Latinx families’ wealth. Black families with student loan debt would see a $15,700 wealth increase and Latinx families would see a $27,000 wealth increase.

This plan would likely be paid for out of Sen. Warren’s proposed Ultra-Millionaire Tax, which would impose a 2% annual tax on the 75,000 families in the U.S. with net worths of at least $50 million and a 3% tax on those with assets of $1 billion or more. While on the campaign trail for the 2020 Democratic presidential nomination, Sen. Warren has said she’d use the revenue from that tax to pay for both student debt cancellation and tuition-free college, which she estimates would cost $1.25 trillion over 10 years together. In another estimate, the Warren campaign estimated that this plan alone would cost about $640 billion.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / RapidEye)