Limiting student loan relief by income sounds sensible — it is not

Recent reports indicate the White House is considering canceling a portion of student loan debt but limiting relief to people who earn below $125,000. While an income cap on student debt relief sounds reasonable in theory, it would actually make student debt relief less progressive.

Why? At the heart of the problem is while 95 percent of borrowers make less than the $125,000 cap floated, the government does not actually know how much individual borrowers make. Other recent relief programs with income caps, such as the pandemic stimulus checks and Child Tax Credit payments, had the advantage of being implemented through the Treasury Department, which used tax data to determine who was eligible and provide automatic relief to tax filers. Student loan cancellation, in contrast, must be implemented by the Department of Education, which can’t access borrowers’ tax data. 

That means the cost of keeping relief out of the hands of the 5 percent of borrowers with high incomes is transforming what would otherwise be a straightforward, automatic relief program into a new, bureaucratic application process. That’s a surefire way to ensure that the people who need relief the most won’t get it.

Existing requirements to prove eligibility for means-tested public benefits prevent millions of vulnerable people from receiving the support they need, with roughly 1 in 5 income-eligible people missing out. And while we might reasonably assume the average student loan borrower has more resources to navigate paperwork than the average public benefits applicant, many do not: Some 40 percent of borrowers lack a college degree, and about 16 percent rely on public benefits like the Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), or Supplemental Security Income (SSI). 

Data from existing student loan programs demonstrate that application-based processes fail badly, particularly for the most vulnerable borrowers. 

Take, for instance, income-driven repayment, which allows people to limit their payments to a fixed percentage of their income and to pay nothing at all if their income is below a certain level, with any remaining balance canceled after roughly 20 years. Income-driven repayment has failed miserably to deliver relief to the borrowers who need it most. Only 157 people have ever had their student loans canceled through income-driven repayment, though over 4 million have been in repayment for over 20 years.

Part of the problem is rampant mismanagement, but the core problem is that borrowers have to apply and document their income to benefit from the program, and too few of those eligible have succeeded in doing so. For example, 54 percent of borrowers with incomes below $20,000 have fallen behind on their student loans without accessing income-driven repayment — even though they would be entitled to $0 payments in the program.  

Even programs that promise student debt cancellation outright have failed when borrowers have been required to apply. In each of the cancellation programs — for people who are disabled, whose school closed on them, or whose school engaged in fraud — even in the best case scenarios, when the department has identified groups of borrowers eligible for relief and mailed them an application, only about half of those identified as eligible for relief have gotten it.

Borrowers who miss out are not choosing to forgo relief — most default and experience severe financial consequences, like damaged credit and seizure of their public benefits. Rather, efforts to notify them of their right to relief and help them navigate the application process are failing.

Widespread cancellation would get more public attention and the eligibility criteria should be easier to understand, so the failure rate may be lower than with other relief programs. But it won’t drop from 50 percent to 0. 

Roughly 1 in 5 borrowers are in default despite existing relief programs, and many are not easily reachable — the department lacks contact information for about a quarter of them. Some, like the borrowers I work with as a legal aid attorney, are experiencing homelessness and are focused on day-to-day survival. Others are disabled or elderly and can’t access forms online. Some are in abusive relationships and cannot safely get income information from their spouse. And I’ve met many people who didn’t even know they had student debt — fast-talking recruiters at for-profit schools rushed them through paperwork that they thought was for grants — until years later when their tax refund or Social Security was seized to collect. 

It’s these borrowers who will not get the loan relief they desperately need if there is an income cap. That’s a high price to pay to keep the small number of high-income borrowers from benefiting.

Abby Shafroth is the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, where she engages in policy research, edits a treatise on student loan law, and represents low-income people seeking assistance with accessing their student loan rights.