Continued Claims that Student Loan Cancellation Benefits the Wealthy are Still False.

Cancellation will largely benefit the un-wealthy. Also, older borrowers not able to pay down their loans over 20+ years don’t have household incomes of $312,000.

A number of beltway “experts” are currently claiming that cancelling student loans would unduly benefit the wealthy. These claims, based upon blatantly flawed research, have been used by very well-coordinated media/social media campaigns, designed to kill the push for student loan cancellation, that have flooded the zeitgeist in recent weeks.

Most recently, Professor Kent Smetters (The Wharton School at the University of Pennsylvania) is claiming that beneficiaries of Biden’s new plan to cancel interest for people who have been in repayment for 20 or more years have, on average, a household income of $312,000 (he also falsely claims that Biden’s current cancellation proposals will “cost” the taxpayers over $500 Billion, but we will ignore that for now).

In 2022, Adam Looney (University of Utah), claimed that broad student loan cancellation would be regressive because student loan borrowers who are in the top 20% income bracket hold 30% of the debt. Looney uses the example of a young, high-earning medical school graduate who earns more than a young non-college graduate to claim that broadly cancelling loans would be unfair.

Very simple analysis of both of these claims, however, reveals that not only are they completely wrong, their analysis is deeply flawed, and badly misleading to begin with.

First the obvious:

• Wealthy people cannot get federal student loans. 100% of all borrowers had to prove financial neediness in order to get the loans.
• 40% of all borrowers never graduated.
• Tens of millions of borrowers went to trade schools and community colleges.
• Before the pandemic, 85% of all borrowers were either unable to make payments, or were paying but couldn’t pay enough to avoid an increasing loan balance. Wealthy people don’t get behind on their debt.
• Today, 80% of all borrowers are unable to make payments. These, clearly, are not wealthy people.

Debunking Smetter’s Claim:

Smetter’s claim that the average household income of people in repayment on their student loans for more than 20 years is $312,000 is not sourced. Wherever they may have pulled this assumption from, it flies in he face of the obvious: People who were unable to pay down their student loans balance on student loans 20–25 years after leaving college clearly do not have incomes anywhere near $312,000. People with that level of income typically have no problems retiring their student debt, and usually in far less than 20–25 years, so they would not fall into the group of debtors that Smetters is pointing to.

Whatever earnings data Smetters might be cherry-picking to make this claim, it does not apply to student loan borrowers who have been underwater on their student loans for their entire adult lives. That he fails to source this income data is probably an indication that he cannot support this outrageous and false claim.

We also dispel Stetter’s claim that Biden’s student loan cancellation proposals will cost the taxpayers hundreds of billions (or even trillions) of dollars here. In actually fact, the true cost of these cancellations is essentially zero. Stetter is- unethically- conflating the cancellation of profit with true taxpayer cost.

Debunking Adam Looney’s Claim:

Looney’s claim that student loan cancellation is “regressive” is similarly, and outrageously, false. By his own admission, the data he relied on, (voluntary survey data), was dicey at best. Adam’s own words: “The sample is too small, 30 percent of aggregate student debt is missing and not accounted for, the value of debt is frequently missing and statistically imputed”.

Given that financially distressed individuals (who tend to be lower-income) are far less likely than financially stable individuals (who tend to be higher-income) to fill out voluntary surveys, and the fact that 30% of the debt is unaccounted for in the first place, the accuracy of Looney’s top line claim that the highest 20% of earners own 30% of the debt is dubious, at best.

But even accepting this suspicious claim implies directly that the bottom 80% of earners hold 70% of the debt. So by Looney’s own analysis, cancelling federal student loans will largely benefit the “un-wealthy”, and thus cannot be called regressive.

But what is far more important: The highest balance student loan borrowers aren’t young people at all- they are older borrowers who, by and large, have been stuck with student loans for years or decades, and who now owe far more than younger people, despite having borrowed far less, and many years or decades ago.

While statistically, this age group may have higher earnings, people with student loans who were unable to even pay down (much less extinguish) their student loans over 20+ years clearly have an earnings deficiency, and earn nowhere near what both Smetters and Looney are claiming. People who do have earnings in line with these statistical averages typically are able to pay down/extinguish their loans in less than 20 years, so have fallen out of this cohort of borrowers, leaving only lower income borrowers in the set.

Adam Looney is playing the same statistical trick as Smetters: Assuming- wrongly- that older, student loan borrowers who were unable to pay down their student loans over their adult lives have incomes consistent with the average for their age/Education (assuming that this is the sort of assumption they are making).

This is, at best, academic laziness. At worst, it is ethical and moral bankruptcy and fraud. Whichever it is, the actual, real harm that these two men have caused with their abominable research is unfathomably large, and ongoing:

Source: U.S. Department of Education (Q4 2020)

Interestingly, older borrowers now outnumber younger borrowers, both for the under/over 35 split, and the over 50/under 25 split. In both cases, the older borrowers owe far more than their younger counterparts, despite having borrowed far less.

Source: U.S. Department of Education (Q4 2020)

Source: U.S. Department of Education (Q4 2020)

Source: U.S. Department of Education (Q4 2020)

Therefore, it is clear that the “research” from both Adam Looney and Kent Smetters is deeply flawed, wholly unreliable, and frankly, outrageously misleading. The fact that both of these men received Ph.D’s in economics from Harvard University, and that both had careers at the U.S. Treasury Department is particularly disturbing.

Why this is important:

The federal student loan system is catastrophically failed by all rational metrics. 40% of all borrowers never graduated. 80% were “underwater” on their loans even before the pandemic. Similarly (before the pandemic), most student loan borrowers (64.3%) were not making payments at all. The default rate for 2004 students- who borrowed less than a third of what is borrowed today- is a whopping 40%. Most tellingly: Today, 80% of all borrowers are unable to make payments on their student loans.

The lending system is finished, and no amount of beltway spin- even if/when orchestrated through the Treasury Department can make this not true.

This failure is a direct result of the wholesale removal of consumer protections from these loan. Not only have bankruptcy protections and statutes of limitations been stripped uniquely from federal student loans, the loans have also been stripped of Truth-in-Lending laws, greatly restricted Fair Debt Collection laws, and even state usury laws are not applicable to federal student laws. This, and a draconian collection regime which serves to hyper-inflate loans with penalties, fees, etc, have pushed the lending system over the brink of legitimacy.

The Founders called for uniform bankruptcy laws. This right must be immediately returned to all student loans. Biden should order the Department of Education to stop opposing student loan borrowers in bankruptcy court, and Congress should immediately return bankruptcy to all student loans by passing both S.2598 and HR. 4907.

Biden also has the power to cancel all federally owned loans without needing congressional approval, appropriation and without adding anything to the national debt. The President should exercise his loan cancellation authority, and end this national threat of a lending program.

We can do better than this.

If you agree, please sign and share this petition.