Student Loan Debt And Consumer Behavior: Spending Patterns And Saving Habits – At the same time, the COVID-19 pandemic has caused historic levels of unemployment and economic hardship. Even before the pandemic, many student loan borrowers faced payment burdens of more than 10 percent of their take-home income or debt traps, in which they could not keep up with monthly interest payments (Farrell, Greig, and Sullivan 2020). Government action suspended payments and interest accumulation on federal student loans beginning in March 2020 to ease economic burdens brought on by the pandemic. In addition to this temporary relief, policymakers have proposed permanent forgiveness of federal student loans, which represent approximately 92 percent of total student loan debt (Amir, Teslow, and Borders 2020).

In this insight, we use administrative bank and credit bureau data to estimate how the benefits of different debt cancellation scenarios would be distributed by household income, borrowers’ remaining time to pay off their debt, and borrower race and ethnicity.

Student Loan Debt And Consumer Behavior: Spending Patterns And Saving Habits

We examine four scenarios: (1) universal cancellation of up to $10,000 of each debtor’s balance; (2) cancellation of up to $50,000 of debt for people earning less than $125,000; (3) cancellation of up to $25,000 for people earning less than $75,000 and phase out at $100,000; and (4) cancellation of up to $50,000 with the same income phase-out as scenario 3.

Student Loan Forgiveness Is Complicated, Because This Is America

From our linked bank and credit bureau data, we take individual borrowers’ student loan balances, annual income and debt repayment patterns in 2016 to calculate various aspects of these hypothetical cancellation scenarios. First, how much debt will be cancelled? Second, how is canceled debt distributed across the income distribution—how much goes to high- versus low-income households? Third, how much of the canceled debt is held by people who are on track to repay their loans on time versus those who may never be able to repay in full? Finally, how is canceled debt distributed across racial and ethnic groups?

We find that income cutoffs significantly reduce the total amount of debt forgiven and make cancellation less regressive, while all cancellation scenarios we examine distribute forgiveness across borrowers by race in roughly the same way. The $10,000 universal cancellation will forgive about a quarter of all student loan debt, while the $50,000 income-restricted cancellation will forgive half of all debt. The $25,000 cancellation with income phase-out cancels the same amount of debt as the $10,000 universal cancellation. Cancellation also disproportionately benefits middle- and high-income families, although income targeting makes cancellation less regressive. This relative regressivity is driven by the fact that higher-income households carry greater debt, often from professional or graduate degrees. Conversely, more aggressive income targeting does not necessarily result in a greater share of forgiveness going to borrowers in debt or facing long repayment horizons. However, increasing the total available cancellation slightly increases the share of forgiveness received by borrowers with a long-term repayment horizon. The share of cancellations received across race and ethnicity is largely unaffected by income targeting and reflects the share of total debt held by race and ethnicity.

For example, a $25,000 cancellation that phases out between $75,000 and $100,000 in income forgives about the same amount of total debt as the universal $10,000 cancellation (28 versus 27 percent), but gives $3.85 to low-income borrowers for every dollar spent on high-income borrowers. -income borrowers are given. A $50,000 cancellation with the same phase-out cancels more debt (39 percent of all debt) and is slightly more regressive, but provides more total forgiveness to low-income borrowers, borrowers facing a debt trap or long repayment horizons, and Black and Latinx borrowers.

It should also be noted that several options available to policy makers have not been considered here due to limitations in our data. For example, exempting graduate school debt would likely make forgiveness less regressive and reduce overall costs. Forgiving accrued interest is also likely to be progressive, as people with the means to repay debt are unlikely to have accumulated much back interest.

Inflation Forces Consumers To Ask: Can I Live Without It?

Navigate to find index Navigate to find 1 Navigate to find 2 Navigate to find 3 Navigate to find 4 Navigate to find 5

To find one: The cancellation scenarios considered would forgive between 27 and 50 percent of all federal student loan debt.

Figure 1 shows the total amount of debt canceled under each scenario. Because we observe only take-home income in our checking account data, we translate the gross income cutoffs of $75,000, $100,000, and $125,000 into net income limits of $54,263, $72,350, and $90,438 using a 20 percent tax withholding rate and adopting an additional payroll tax rate of 7.65 percent.

The $50,000 cancellation with income limit forgives the most total debt (50 percent of all debt), or $786 billion from a base of $1.566 trillion. A more aggressive income limit such as the $75k-to-$100k income phase-out significantly reduces the total debt canceled (39 percent of debt or $606 billion) for the same $50,000 potential cancellation for individuals. A $25,000 cancellation with phase-out further reduces total debt forgiven (28 percent, $446 billion) while a universal $10,000 cancellation does not further reduce total forgiveness (27 percent, $422 billion) despite the significantly lower amount of forgiveness granted to individual borrowers. Combined, these alternatives would leave between $919 billion and $1.283 billion in outstanding federal and private student loans, on par with 2012-2014 levels.

How Is Student Loan Debt Threatening Students? [interview]

Note: Based on total outstanding student debt of $1.6 trillion. Assume that gross income limits translate to a take-home income limit based on a federal withholding rate of 20% and a payroll tax rate of 7.65%. “Income cap” limits cancellation for people who earn less than $125,000 a year. “Phase out” gives full cancellation to people earning less than $75,000 a year and reduces cancellation as income increases so that people earning more than $100,000 receive no cancellation.

Finding Two: Student debt cancellation disproportionately benefits middle- and high-income families, although income targeting makes cancellation less regressive.

We find that a disproportionate amount of debt forgiveness goes to middle- or high-income households under all of the cancellation scenarios we consider because higher-income households tend to hold more student debt. However, more aggressive revenue targeting can make a cancellation program significantly more progressive.

The left panel of Figure 2 shows what share of total cancellation dollars goes to each income quintile and the income boundaries of each quintile.

It’s Time For A Debt “jubilee”

Two bar graphs. The left bar graph shows the distribution of cancellation dollars by income quintile. The right bar graph shows the fraction of each quintile group whose student debt is fully cancelled.

Note: Based on balances as of November 2016. Earnings are take-home earnings deposited into Chase checking account between December 2015 and November 2016. Income quintiles based on the entire Chase-Experian sample, including those without student debt. “Income cap” limits cancellation for people who earn less than $125,000 a year. “Phase out” gives full cancellation to people earning less than $75,000 a year and reduces cancellation as income increases so that people earning more than $100,000 receive no cancellation. Assume that gross income limits translate to a take-home income limit based on a federal withholding rate of 20% and a payroll tax rate of 7.65%.

Under the universal $10,000 cancellation (shown in blue), only 12 percent of cancellation dollars go to the lowest quintile (i.e., the lowest 20 percent of earners) while 23 percent go to the highest income quintile. Under the income-capped $50,000 scenario (green), the highest income quintile receives almost no forgiveness because the vast majority of people in the top quintile exceed the $125,000 gross income limit ($90,438 net income limit). However, the share of forgiveness going to the lowest income households is only slightly higher (14 percent) while the share going to borrowers in quintiles 3 and 4 is higher. This is driven by the higher balances held by higher-income households, such as greater debt for professional school, medical school, etc., which is discussed more in Figure 3 below. The scenarios with an income phase-out and $25,000 and $50,000 cancellation are very similarly distributed across income groups and provide relatively more relief to borrowers in quintile 1, while middle-income borrowers (quintile 3) still receive approximately twice as much as borrowers in quintile 1.

The right panel of Figure 2 shows what fraction of people within each quintile have all their debt forgiven. The universal $10,000 cancellation would completely eliminate student loan debt for 48 percent of the lowest earning group versus 32 percent for the highest earning group. The $50,000 cancellation policies eliminate all debt for 87 to 90 percent of borrowers in the first three quintiles. Note that both $50,000 policies produce nearly identical results across this income range because neither scenario’s income limits have any effect for quintiles 1 and 2 and most of quintile 3. The $25,000 option completely cancels almost as many people in this range as the $50,000 options (70–75 percent).

How Holiday Spending Compares Around The World

This dynamic is not surprising given the distribution of balances within each income quintile, which can be seen in Figure 3. For example, the median debt

Reduce student loan debt, consumer spending patterns, student loan debt consolidation, settling student loan debt, consumer spending habits, consumer spending behavior, student loan debt assistance, consumer spending and saving, consolidating student loan debt, refinance student loan debt, refinancing student loan debt, managing student loan debt