Student loans are packaged together and then sold as financial securities, just like auto loans and credit card debt and home mortgages. These asset-backed securities pay a return to their investors as the debts are repaid.
If outstanding students loans were to be cancelled, then the investors in this securities would probably be bailed out by the federal government–which was closely involved in securitizing these loans in the first place, and does not want to get a reputation for reneging on its debts.
If such a debt cancellation happened, how would the benefits be distributed?
Adam Looney tackles this question in “Student Loan Forgiveness Is Regressive Whether Measured by Income, Education, or Wealth: Why Only Targeted Debt Relief Policies Can Reduce Injustices in Student Loans” (Brookings Institution, Hutchins Center Working Paper #75, January 2022).
One basic insight of the paper is that those who have college degrees will tend to have, on average, more income, education and wealth over their lifetimes than those who do not.
An additional insight is that many of the biggest student loan debts are not incurred by someone trying to pick up some career training at the local community college, but rather by those borrowing to finance advanced postgraduate degrees in areas like medicine and law.
Thus, Looney writes:
There is no doubt that we need better policies to address the crisis in student lending and the inequities across race and social class that result because of America’s postsecondary education system.
But the reason the outcomes are so unfair is mostly the result of disparities in who goes to college in the first place, the institutions and programs students attend, and how the market values their degrees after leaving school.
Ex-post solutions, like widespread loan forgiveness for those who have already gone to college (or free college tuition for future students) make inequities worse, not better. That’s clearly true when assessing the effect of loan forgiveness: the beneficiaries are disproportionately higher income, from more affluent backgrounds, and are better educated.
For example, here’s a calculation by Looney of who holds student debt, broken down by lifetime wealth and by race. By far the biggest share of student loans is held by white non-Hispanic borrowers who over their lifetimes will be toward the top of the wealth distribution.