Researchers Offer Path to Address Hardship Posed by Student Debt
By Aissa Canchola Bañez | January 18, 2024
Ever since the extreme conservative majority on the Supreme Court robbed 40 million people of student debt cancellation last year, the Biden Administration has been busy working on plans to utilize a different tool—the Higher Education Act—to provide borrowers with much-needed relief. While the Administration just finished a major step in the process, new research provides a path for finishing the job.
In December, the U.S. Department of Education (the Department) wrapped up its third negotiated rulemaking session, which brought together stakeholders, including students and borrowers, civil rights groups, disability advocates, legal services organizations, and state Attorneys General to inform the Administration’s debt relief plan. At the beginning of the process, the Department laid out proposals to provide targeted relief to borrowers in certain circumstances.
Recognizing the need for a broader category of relief, the Department also asked negotiators for ideas on how to provide relief for borrowers experiencing hardship—paving the way for the Department to create a robust rule that could wipe away debt for millions of borrowers and finally make dreams of economic mobility a reality. Unfortunately, despite extensive feedback and proposals submitted by negotiators on the committee, the Department has yet to unveil a proposal that would address student loan debt hardship, running the risk of leaving behind borrowers in desperate need of debt relief.
Most recently, an interdisciplinary team of economists and law scholars at the University of California Student Loan Law Initiative (UC SLLI) published a new study using specific markers of hardship to pinpoint the amount of debt that causes this hardship to individuals. The study builds on the research base that has grown over the last decade confirming the myriad of ways that student debt is inhibiting social and economic mobility and causing financial hardship—from jeopardizing retirement security and inhibiting savings, diminishing homeownership, preventing folks from starting or growing their family or starting a small business, to driving workers out of public service jobs, rural communities, and even dampening the growth of the U.S. economy. By looking at the broad effects of student debt on the economy, this existing research demonstrates how student debt imposes hardship disproportionately on economically vulnerable communities writ large.
The metrics identified in this new study provide a legal and economically sound guide for President Biden to deliver relief for the millions experiencing hardship. The experts measured the relationship between a borrower’s student debt load (a borrower’s outstanding student loan balance) as well as student debt burden (a borrower’s student-debt-to-income ratio), and six different measures of economic mobility and financial hardship. The six indicators considered were: credit score, homeownership, the borrower’s student debt compared to their income, past-due debts on a credit report, bankruptcy, foreclosure or other “adverse” legal proceedings, and repayment of an auto loan.
What did the experts find?
For lower-income borrowers (those from households earning less than $71,000 per year), the presence of any outstanding student debt resulted in substantial hardship. More specifically, lower-income borrowers owing student debt were more likely to experience a 50-point drop in their credit score, a decline in homeownership, an increased likelihood of bankruptcy or foreclosure, and a higher likelihood of struggling to repay financial obligations like medical bills and other debts.
For middle-income borrowers (those from households earning more than $71,000 up to $131,500), the experts found that borrowers faced hardship once their student debt burden exceeded 30 percent of their household income. Specifically, experts found that borrowers with student debt burdens exceeding 30 percent of their income were more likely to have trouble repaying financial obligations, see a decline in credit scores, and an increased likelihood of bankruptcy, foreclosure, and other adverse outcomes.
What do the experts recommend?
To address the hardship identified in their research, the experts urged the Biden Administration to consider providing full cancellation for borrowers from households earning below $71,000 and ensure no middle-income borrower owes student debt that exceeds 30 percent of their income (no more than $40,000). If adopted, this proposal has the potential of completely freeing millions of the lowest-income borrowers from the economic hardship associated with student debt and drastically improving the economic livelihoods of millions of middle-income borrowers and their families.
President Biden’s “Plan B” debt relief proposal must also address the economic hardship of student loan debt.
For too many, the pursuit of a higher education has not led to the promise of economic mobility, and for many of the most vulnerable, it has only exacerbated economic inequality. Any final debt relief proposal from the Biden Administration must include an effort to provide relief to borrowers that are experiencing hardship.
Just this week, leading organizations in the fight to cancel student debt urged the Administration to come back to the table to present a draft proposal that can address hardship. Unless a proposal is presented before the negotiated rulemaking committee, the Department cannot finalize a hardship regulation. This new research by UC SLLI researchers gives the Department the tools that it needs to craft an economically and legally sound hardship regulation needed by tens of millions. President Biden started the critical work of providing borrowers with much needed relief—now his Administration must finish the job.
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Aissa Canchola Bañez is the Senior Advisor for Policy and Strategy at the Student Borrower Protection Center. She brings a decade of experience in Congress, Executive Agencies and advocacy working to advance policy solutions to improve the lives of workers and families and create a more just and equitable society. Prior to joining the SBPC, she served as Deputy Chief of Staff and Legislative Director for Congresswoman Ayanna Pressley (MA-07) where she led the Congresswoman’s policy work, including efforts to protect borrowers and make student loan debt cancellation a reality.