Elizabeth Warren's loan forgiveness plan won't be the windfall for the rich some feared: Study

An independent analysis of Sen. Elizabeth Warren's student loan relief plan shows that it would likely help middle-income borrowers the most, a finding that may help to ease one of the political left's biggest concerns about debt forgiveness.

Some left-leaning voices argue that wiping out college debt — a proposal backed by many progressives — would not accomplish exactly what proponents hope. The top quarter of American earners hold about half of all outstanding student loans, meaning blanket loan forgiveness would give high-income borrowers the most overall relief.

A new study analyzing 2020 Democratic presidential candidate Warren's plan — which forgives up to $50,000 in debt and scales back relief for higher-income Americans — may in part reduce concerns about a windfall for the wealthiest Americans. The top U.S. income group analyzed, those making more than $110,000, gets plenty of help from the senator's measure: it would cancel an average of about $19,000 in debt for those borrowers, and 53% of them would get their loans fully forgiven, according to an Urban Institute study released Thursday.

But the Massachusetts Democrat's proposal would erase student debt for more than 80% of the loan holders in each of the four lower-income groups assessed in the study. They would all see higher average forgiveness than the top earners.

Phasing out benefits for higher-income student debt holders "is successful at reducing" the benefits for top earners relative to lower-income borrowers, said Matthew Chingos, vice president for education data and policy at the Urban Institute. Chingos previously told CNBC that it may be difficult for Democrats to argue against Republican tax cuts that benefit the wealthiest Americans most if they also back a widespread debt relief plan that boosts high-income Americans.

Still, in raw dollars, the most relief under Warren's plan would go to student loan holders making between $65,000 and $109,000 — largely because more people in that group take on debt to get through college and borrow more when they do so. Chingos said, "There is still this concentration of benefit in the middle- or upper-middle-income groups."

Warren announced her student debt relief plan on Monday, adding to a list of proposals she has put forward to dramatically reshape the U.S. economy. The senator, who has long called for policies to hold large corporations and the wealthiest Americans in check, has aimed to cast herself as one of the more populist voices in the Democratic primary.

Conservatives have criticized the potential cost of Warren's student debt proposal and whether it would be an effective use of money. Lindsey Burke at The Heritage Foundation contended that it would carry an "exorbitant cost to taxpayers" and "fail to achieve the goal of greater equality in access to education."

Warren's debt measure would forgive up to $50,000 in loans for people with incomes under $100,000. As incomes get higher, borrowers would get less relief. At the $250,000 level — or top 5% of earners — forgiveness would cut off completely.

Her campaign calls the student loan measure a progressive way to boost the economy and consumer spending, in large part because a tax on the wealthiest American families would fund the debt relief.

"This is a highly progressive proposal — we're taxing the fortunes of people with over $50 million in wealth to provide student loan debt cancellation to 42 million lower-income and middle-class Americans," a Warren aide said. The senator's campaign also pointed to analysis that showed the proposal would help to close the racial wealth gap.

Debt relief for black borrowers would account for 25% of total dollars forgiven, while only 16% of overall U.S. households are black, according to the Urban Institute study. White loan holders would see about 59% of the relief, while white households make up 68% of the total in the U.S., according to the study.

The effect would be less pronounced for Hispanic borrowers. They would see about 10% of the total forgiven dollars and account for 11% of households.

Overall, people in the $65,000 to $109,000 income range would enjoy about 28% of the overall forgiveness, followed by those making between $40,000 and $65,000, who would get about a quarter of the debt relief. People making $22,000 or less would see 14% of the loan relief — in part because they have lower average debt than higher-income groups.

The Urban Institute study estimates Warren's proposal would cost $955 billion. The political left's assessment of the plan could come down in part to whether voters think loan relief is the best use of $1 trillion, Chingos said.

He noted that Democratic primary voters could decide they would rather see a down payment on "Medicare for All," for example, with the same money.

Warren has already proposed to use revenue raised by the wealth tax to fund universal child care, another plan that she says will boost the U.S. economy.

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