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No, “A New Study” Doesn’t Show The Benefits Of Canceling Student Debt

No, “A New Study” Doesn’t Show The Benefits Of Canceling Student Debt
Past Due Student Loan Paperwork

Statement for a Student Loan on a desktop. Loan is PAST DUE with a red rubber stamp. Props include reading glasses, coffee cup and pen. Horizontal photograph. PAST DUE is bright red against the white form. Shot from a high angle looking down.

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As presidential candidates Elizabeth Warren and Bernie Sanders campaign across the country on their plans for mass student loan forgiveness, activists and media outlets are touting a new study that appears to provide some intellectual justification for the candidates’ plans. But a closer reading reveals that the study provides no support for broad student loan cancelation, since it focuses not on a representative sample of student borrowers, but on borrowers in default.

The opportunity for the study arose when National Collegiate, a major holder of private student loans, failed to prove in court that it owned some of the defaulted loans on which it was trying to collect. As a result, the borrowers who owed these defaulted loans were relieved of any further obligation to repay. The authors of the study—Marco Di Maggio, Ankit Kalda, and Vincent Yao—then tracked these individuals’ outcomes relative to a demographically similar control group of defaulted borrowers who did not receive a loan cancelation.

Borrowers whose loans were canceled saw their student-loan obligations decline by about $7,000. In the years following the discharge, borrowers who received relief saw an income bump of about $3,000 relative to defaulted borrowers who saw no relief. Those who received a discharge were also more likely to move across state lines and less likely to be delinquent on other loans.

It’s tempting to assume that these results would apply if every student borrower in the nation received a similar loan cancelation. But the group of borrowers analyzed in this study is key: all were in default on their student debt. Therefore, it’s far more plausible that the positive results seen in this study stem from the resolution of the borrowers’ defaults, not the debt cancelation itself.

Being in default is a far worse situation than simply having student debt. A report by Kristin Blagg of the Urban Institute shows that a borrower’s credit score tends to drop when she defaults on her student loan. Worse credit throws up hurdles to finding a better-paying job, for instance by making it harder to pay moving expenses. But Blagg also finds that later on, as borrowers resolve their defaults by paying off the defaulted loans or returning them to good standing, their credit scores recover and economic mobility comes back into reach.

The “credit score” channel through which student debt plausibly affects economic outcomes is only applicable to borrowers in default. Borrowers who never default on their loans actually see an increase in their credit scores during repayment, according to Blagg’s analysis. To suggest that canceling non-defaulted loans would have the same positive impacts on borrowers as canceling defaulted loans is wrongheaded.

Default has other negative consequences that borrowers in good standing do not suffer. Borrowers who default on their federal student loans can have their wages garnished and tax refunds seized. They can pay thousands of dollars in administrative fees and extra interest. (Though the study in question concerned a cancelation of private student debt, which does not threaten borrowers with these punitive actions, some defaulted borrowers in the control group may have federal loans and thus experience these consequences.)

All of this confirms what we’ve known for some time: student loan default is a bad thing. The solution, though, is not to automatically forgive the loans of borrowers who default, since that would encourage more borrowers to default on their loans. Rather, policymakers should emphasize helping student borrowers avoid default in the first place and creating clear pathways to painlessly resolve defaults when they do occur.

The Di Maggio-Kalda-Yao study is a fine contribution to our knowledge of the negative consequences of student loan default. But observers and the media should not oversell its findings. The study’s results are agnostic on the question of whether there are benefits to canceling student loans for borrowers who are not in default, and they certainly do not justify the trillion-dollar mass loan forgiveness schemes offered up by presidential candidates. Partisans looking for something to rationalize those will have to keep searching.

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Past Due Student Loan Paperwork

Statement for a Student Loan on a desktop. Loan is PAST DUE with a red rubber stamp. Props include reading glasses, coffee cup and pen. Horizontal photograph. PAST DUE is bright red against the white form. Shot from a high angle looking down.

Getty

As presidential candidates Elizabeth Warren and Bernie Sanders campaign across the country on their plans for mass student loan forgiveness, activists and media outlets are touting a new study that appears to provide some intellectual justification for the candidates’ plans. But a closer reading reveals that the study provides no support for broad student loan cancelation, since it focuses not on a representative sample of student borrowers, but on borrowers in default.

The opportunity for the study arose when National Collegiate, a major holder of private student loans, failed to prove in court that it owned some of the defaulted loans on which it was trying to collect. As a result, the borrowers who owed these defaulted loans were relieved of any further obligation to repay. The authors of the study—Marco Di Maggio, Ankit Kalda, and Vincent Yao—then tracked these individuals’ outcomes relative to a demographically similar control group of defaulted borrowers who did not receive a loan cancelation.

Borrowers whose loans were canceled saw their student-loan obligations decline by about $7,000. In the years following the discharge, borrowers who received relief saw an income bump of about $3,000 relative to defaulted borrowers who saw no relief. Those who received a discharge were also more likely to move across state lines and less likely to be delinquent on other loans.

It’s tempting to assume that these results would apply if every student borrower in the nation received a similar loan cancelation. But the group of borrowers analyzed in this study is key: all were in default on their student debt. Therefore, it’s far more plausible that the positive results seen in this study stem from the resolution of the borrowers’ defaults, not the debt cancelation itself.

Being in default is a far worse situation than simply having student debt. A report by Kristin Blagg of the Urban Institute shows that a borrower’s credit score tends to drop when she defaults on her student loan. Worse credit throws up hurdles to finding a better-paying job, for instance by making it harder to pay moving expenses. But Blagg also finds that later on, as borrowers resolve their defaults by paying off the defaulted loans or returning them to good standing, their credit scores recover and economic mobility comes back into reach.

The “credit score” channel through which student debt plausibly affects economic outcomes is only applicable to borrowers in default. Borrowers who never default on their loans actually see an increase in their credit scores during repayment, according to Blagg’s analysis. To suggest that canceling non-defaulted loans would have the same positive impacts on borrowers as canceling defaulted loans is wrongheaded.

Default has other negative consequences that borrowers in good standing do not suffer. Borrowers who default on their federal student loans can have their wages garnished and tax refunds seized. They can pay thousands of dollars in administrative fees and extra interest. (Though the study in question concerned a cancelation of private student debt, which does not threaten borrowers with these punitive actions, some defaulted borrowers in the control group may have federal loans and thus experience these consequences.)

All of this confirms what we’ve known for some time: student loan default is a bad thing. The solution, though, is not to automatically forgive the loans of borrowers who default, since that would encourage more borrowers to default on their loans. Rather, policymakers should emphasize helping student borrowers avoid default in the first place and creating clear pathways to painlessly resolve defaults when they do occur.

The Di Maggio-Kalda-Yao study is a fine contribution to our knowledge of the negative consequences of student loan default. But observers and the media should not oversell its findings. The study’s results are agnostic on the question of whether there are benefits to canceling student loans for borrowers who are not in default, and they certainly do not justify the trillion-dollar mass loan forgiveness schemes offered up by presidential candidates. Partisans looking for something to rationalize those will have to keep searching.

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