The nation’s tax system invisibly subsidizes high-wealth households, who use Coverdell and 529 education savings accounts so that tuition functions as a tax-advantaged intergenerational transfer. For students with education debt, the IRS allows tax filers (married or single) to deduct up to $2,500 in student loan interest from their taxes each year. This means that borrowers with high debts will only be able to deduct a portion of their interest payments. According to our Brookings colleagues, four years after graduation, the average Black college graduate owes $52,726, compared to $28,006 for the average white college graduate. With federal interest rates between 2.75% and 5.3%, the average white household will be able to deduct their complete interest payment each year while the average Black household will not. The tax system prevents low-wealth, high-income households from ever catching up with high-wealth households.

Student debt cancellation is not regressive

The most frequent argument against cancelling student debt is that it would be regressive: Because student debtors have college educations, they are better off than those who ostensibly didn’t go to college. A variation on this claim is that higher-balance borrowers tend to have higher incomes. The former claim rests on a comparison of student debtors to those without student debt (and imputes incomes to each group), while the latter concerns comparisons between borrowers.

Neither claim is factual. First, having student debt does not entail that one went to college, let alone graduated. Many families assume student loans to contribute toward their children’s and grandchildren’s education; indeed, policy encourages this in the form of parent PLUS Loans, which institutions actively market to the parents of their enrollees.Continue reading→