The blog of the Urban Institute
April 12, 2021

A More Targeted Approach to Student Loan Forgiveness

April 12, 2021

Student loan forgiveness remains a distinct possibility, but plans to forgive $10,000 (or $50,000) of everyone’s debt are neither well targeted nor a solution for future student borrowers. Policymakers wanting to better target loan forgiveness to those who should not have had to borrow so much in the first place could consider retroactively doubling Pell grants. Such a policy would direct a larger share of dollars to low-income students and students of color and could be applied going forward to make college more affordable for future students.

Some policymakers favor blanket forgiveness, which has the appeal of simplicity. But blanket forgiveness is often regressive, offering the same amount of relief (and often more) to borrowers with graduate degrees and high incomes as struggling borrowers who did not complete a degree program.

As a result, some suggest targeted forgiveness, typically based on current or previous circumstances. Though using current circumstances seems intuitive, there are disadvantages. Recent borrowers’ current incomes tend to fluctuate a great deal as they navigate early career transitions, might not reflect future lifetime earnings (for example, medical students in a residency or law students in a clerkship), and might be difficult to collect data on. Conversely, a borrower’s previous income and wealth reflect the challenges they likely faced growing up, have already been measured (in the Free Application for Federal Student Aid), and are highly correlated with future income.

Retroactively doubling Pell is targeted based on previous circumstances, and it’s nearly as simple to implement as blanket forgiveness. Policymakers could forgive up to the cumulative amount of Pell grant dollars received by the student while in college for roughly the same cost as forgiving up to $10,000 for all borrowers. Since Pell grants are based on income and wealth while in college, a Pell-based approach would target borrowers from lower-income backgrounds.

Pell-based forgiveness would also disproportionately benefit Black borrowers. Because Black households have lower incomes and far less wealth than white households, on average, Black students receive Pell grants at a much higher rate than white students and would be more likely to receive forgiveness under a Pell-based approach.

Retroactively doubling Pell would also target borrowers less likely to have family resources to rely on. For those from the lowest-income households, retroactive Pell is more generous than the $10,000 forgiveness plan; a student receiving the maximum Pell grant for each year of a bachelor’s degree would receive more than twice as much forgiveness as under the $10,000 plan. This would provide some small compensation for the larger obstacles these students faced during and before their studies.

To understand how retroactive Pell compares with the $10,000 forgiveness plan, I consider a sample of students who entered college in the 2011–12 academic year and who had federal loans in 2017. Though this sample may not be representative of all borrowers, the patterns I find are likely to hold.

Retroactive Pell turns out to be far more racially progressive than broad forgiveness. Under the blanket forgiveness plan—wherein each borrower is forgiven up to a maximum of $10,000—dollars are allocated roughly in proportion to the racial and ethnic makeup of borrowers. White borrowers would actually benefit slightly more than Black or Hispanic borrowers—$8,500, on average, compared with $8,400 and $8,100, although fewer would see their debt completely erased (29 percent, compared with 33 percent for Black students and 38 percent for Hispanic students).

Under retroactive Pell, Black students and Hispanic students would receive proportionately more. The average Black borrower would receive roughly $10,100 under this plan (more than the maximum under the $10,000 plan), Hispanic borrowers would receive roughly $8,500, and white borrowers would receive $6,200. Eighty-eight percent of Black borrowers would receive some forgiveness, compared with 84 percent of Hispanic borrowers and 62 percent of white borrowers.

Bar chart showing racial progressivity of the $10,000 and retroactive Pell grant plans

By definition, the Pell plan is also more progressive from the perspective of a student’s household income when applying to college because it is based on the same factors. Though the $10,000 plan gives all borrowers roughly the same amount of forgiveness (in fact, forgiveness increases slightly for those from wealthier backgrounds, as they are more likely to have at least $10,000 in student loans), the Pell plan targets forgiveness to those students who are likely least able to rely on help from their families in paying their loans.

Bar chart showing the average dollar amount forgiven in the $10,000 plan versus the retroactive Pell grant

Retroactive Pell also has the benefit of aligning debt forgiveness with a forward-looking policy to reduce borrowing among future students. Congress could simultaneously double Pell for current students and then phase out forgiveness so all current and recent students would have received roughly double their actual Pell grant.

Retroactive Pell is also easily implementable. The data already exist; no new means-testing or income certification would be needed. It would likely cost no more than the $10,000 plan. For the cohort examined in this post, retroactive Pell would be about 10 percent cheaper.

If loan forgiveness is in the cards—and it has been made more likely with the elimination of taxability—policymakers could consider approaches, such as doubling Pell prospectively and retroactively, that combine better targeting dollars to students who should not have been saddled with debt in the first place and ensuring their contemporaries do not have to borrow as much.

Methodology note: This analysis relies on a single cohort of borrowers from the Beginning Postsecondary Students Longitudinal Study who entered college in the 2011–12 academic year. Their cumulative borrowing and Pell grant receipt was measured in 2017. Although the loan amounts include graduate student loans, many students may not have finished—or even begun—their graduate studies by the time these data were collected, so these numbers may not reflect total debt for all students. More generally, these data provide a snapshot for only a single cohort of students—the population of all borrowers with outstanding debt may not be perfectly reflected in these numbers. However, given the typical forgiveness amounts under both of these scenarios, the general conclusions are likely to hold.


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