Could the Public Service Loan Forgiveness Program Mitigate Racial Wealth Gaps?

Abstract

Weighing on an already large, stubborn wealth gap between White and Black families is the dramatic rise of student loan debt that has disproportionately accrued to Black families. One of the most promising paths toward alleviating this debt is an expansion of the Public Service Loan Forgiveness (PSLF) program, which cancels federal student loan debt based on public or nonprofit employment but through which it's generally been difficult to qualify for cancellation. Using the Survey of Consumer Finances, we identify student loan debt as PSLF-eligible or PSLF-ineligible under more-generalized versions of the program and use decomposition methods to estimate how much each type of debt contributes to White-Black wealth gaps throughout the wealth distribution. Erasing PSLF-eligible debt has essentially no effect on wealth gaps at any point in the distribution, mechanically or otherwise. In contrast, erasing PSLF-ineligible debt reduces gaps throughout, driven by a mechanical effect toward the bottom of the distribution and a wealth-building effect at the median and above. Altogether, our results indicate that tying student loan forgiveness to public service will not narrow White-Black wealth gaps while also highlighting the importance of looking past conditional means or medians in evaluating policies toward that objective.

Keywords: Student Loans, Wealth Inequality, Public Service Loan Forgiveness, Racial Wealth gaps JEL classification: Primary: I22, I24 Secondary: G51, D14, H81