3 Steps to Bring Much-Needed Equity to Student Debt

On June 30th, 2023, the Supreme Court struck down the Biden administration’s cancellation of $430 billion in student debt, which would forgive up to $20,000 in student loans per student. Within two weeks, the Secretary of Education launched a new rule-making committee to “prepare proposed regulations for the Federal Student Aid programs,” per Title IV of the Higher Education Act of 1965. Additionally, the Administration announced the new Saving on a Valuable Education (SAVE) Plan, an income-driven repayment plan that halves borrowers’ payments to 5 percent of their discretionary income, lifts the salary threshold for waiving monthly payment plans to 225 percent of the federal poverty level (rather than 150 percent), and removes unpaid interest on monthly payments submitted to ameliorate negative amortization.

These are certainly welcome changes to many borrowers expecting to restart payments later this year. But as debates and discussions over the student loan crisis continue, it’s critical for policymakers to realize that any successful solutions to student debt relief—and the ways in which that relief is distributed—will have to address racial justice.

Many sociologists and policy researchers like Jalil Mustaffa, Fernanda Addo, Jason Houle, Louise Seamster, and Raphaël Charron-Chénier have done important work disaggregating data to reveal extreme disparities. Addo et al.’s recent work – “Young, Black, and (Still) in the Red” – showed that “Black borrowers report holding about 33 percent more debt than white” borrowers. Moreover, their and others’ budding work sharpens the picture of the policies behind this inequality. Extreme administrative complexity, lack of lending regulations, for-profit colleges’ predatory behavior, and aid calculations relying on income over wealth inhibit Black families’ access to the aid necessary to pay for college. This – coupled with the devastating financial legacies of job market and housing policy discrimination– leads to the accrual of “bad debt” that follows many Black students throughout their lifetimes, warping decisions around homeownership and retirement and negatively impacting the ability to build wealth for future generations, thus perpetuating the cycle.

To move forward, the Biden Administration and the Department of Education would do well to follow existing academic and policy research on the racialization of debt to support racial equity:

1. Make SAVE the default. Currently, students are eligible to sign up for the SAVE plan in the summer of 2023, with those already enrolled in Revised Pay as You Earn (REPAYE) Plan (the existing income-driven repayment plan) automatically transferred over. According to StudentAid.gov, those who enrolled by mid-August are anticipated, to have their adjusted payment by October, when loan payments resume. But researchers note that even selection requirements can generate substantial inequality. One experiment using a test copy of the Student Loan Exit Counseling website found 63 percent of students chose REPAYE when it was the default, but only roughly half as many enrolled when the less-flexible standard plan—with a fixed payment—was the default option. Between this, the lack of transparency amongst loan servicers, and the small 10-day window to enroll in REPAYE, about 54 percent of the lowest-income borrowers fell behind on their payments despite being eligible for $0 per month under REPAYE. Making SAVE the default this summer allows the federal government – at no additional cost – to significantly increase uptake, especially those with greater informational hurdles.
2. Ensure forgiven debt is non-taxable. Consistent with the Public Service Loan Forgiveness, Houle and Addo point out that it is critical for discharged debt to not be classified as taxable income. Without this, debt relief can instead turn into a significant financial hurdle that disproportionately burdens Black borrowers with higher total debt balances. A study from the Urban Institute found that, even under $10,000 of debt forgiveness, almost 50 percent of borrowers in the second income quintile do not have the liquidity to cover taxes owed on the discharged debt. 
3. Continue to explore more expansive relief & postsecondary funding. The SAVE plan forgives balances after 10 years if the balance is under $12,000, and each additional $1,000 borrowed adds one year to the deadline. But Charron-Chenier, Seamster, Shapiro, and Sullivan found that, amongst families with student debt, the median Black household had an average of $30,000 in loans (compared to just $23,000 for median white families). They estimate that $50,000-$75,000 in cancellation would best advance racial equity. Additionally, more work is needed elsewhere in the sector to better fund public universities and Historically Black Colleges and Universities (HBCUs) so they can support more financially accessible postsecondary education. Future rule-making processes for improving diversity and for financial aid should be informed by both considerations.

The SAVE plan is a huge step in the right direction, but there is still a long road ahead to combatting the asymmetrical consequences Black borrowers face as a result of the current aid system. Attending to the racialization of student debt and adapting the scholarship evaluating its contours and solutions is critical as we look for the next steps forward.

This blog post highlights existing phenomenal scholarship on this topic, including:

• Addo, Houle, & Simon: Young, Black, and (still) in the red: Parental wealth, race, and student loan debt
• Houle & Addo: A Dream Defaulted: The Student Loan Crisis among Black Borrowers
• Barlow: Forever in debt: The effects of debt-funded education on racial disparities
• Blom, Chingos, Vilter: Understanding the tax implications of student debt forgiveness
• Charron-Chénier, Seamster, & Sullivan: A pathway to racial equity: Student debt cancellation policy designs
• Cox, Kreisman, Dynarski: Designed to fail: Effects of the default option and information complexity on student loan repayment
• Davis III, Mustaffa, King, & Jama: Legislation, policy, and the Black student debt crisis
• Kaufman: New data shows borrowers of color and low-income borrowers are missing out on key protections, raising significant fair lending concerns
• Mustaffa & Davis: Jim Crow Debt