STUPIDMONEY_StudentDebt

How Would Elizabeth Warren’s Plan to Forgive Student Debt Work in Practice?

Things get complicated once you read the fine print

On Monday, Senator and Democratic presidential candidate Elizabeth Warren hitched her election wagon firmly to the rising tide of concern over the costs of college. It’s about time someone did, since the numbers are mind-melting: Forty-four million people owe $1.52 trillion in student loans. Warren is offering debt forgiveness, along with a plan to make public colleges free, by taxing so-called “ultra-millionaires.” But is it all too good to be true?

$1.52 trillion, you say? Who would pay for that?

Basically, by taxing extremely rich people, which is something Warren has long been adamant is the solution to a lot of the current financial crises we face. The plan estimates that it’d be paid for by a measly two percent income tax on those earning more than $50 million annually and a three percent tax for those who make more than $1 billion. The free-public-college plan would require states to chip in, however, which — as Texas’ many battles with the Obama administration, and California’s dozens of lawsuits against the Trump administration show — probably wouldn’t be a smooth path.

Would everybody with student debt get it erased?

Not quite, although Warren estimates that it would wipe out debt for 75 percent of people with outstanding loans. Here’s how it’d work: Up to $50,000 of debt would be forgiven for households earning less than $100,000. Above $100,000, every additional $3 of annual income would reduce loan forgiveness by $1, going down to zero relief for households earning more than $250,000.

That… makes a lot of sense?

It does! As Noah Smith for Bloomberg Opinion pointed out, the less you earn, the less money you have to pay. “If you never end up earning very much, you never end up paying very much.” Rich people, in other words, don’t need the relief as much as others. There’s another important socioeconomic angle to this, too: It’s been argued that the rising costs of college fall disproportionately on lower-income people, as well as on non-whites and non-Asians, who rely more heavily on loans to cover tuition, room and board, etc. than richer folks do.

What would happen if people actually got this debt relief?

Ideally, good things: The Levy Economics Institute of Bard College estimated last year that a one-time debt-relief program would add more than a million jobs to the economy and increase real GDP by as much as $108 billion per year. Student debt delays both home buying and starting small businesses, and the economy obviously benefits from more home sales and more small businesses.

So what’s the problem?

There’s always a catch, isn’t there? In this case, it depends on whom you ask. For one thing, people allege, as Michael R. Strain did in another Bloomberg Opinion article, that such a massive transfer of wealth actually helps out middle- and upper-class people the most, since they’re primarily the ones who go to college (although the free tuition idea is meant to address that). Strain argues that it’s an entitlement program not for the poor and vulnerable, but for a class of people who don’t need it, calling the idea “ridiculous in a way that should be salient to progressives.” He argues that that money would be better spent helping to lift up the working poor.

There’s also the argument that people who have already managed to pay off their loans get nothing for what they see as virtuous behavior.

Has anyone actually crunched the numbers, though?

Yes — the nonpartisan Brookings Institution just did, but what economist Adam Looney found might not be what Warren had in mind. “[A] quick analysis finds the Warren proposal to be regressive, expensive and full of uncertainties … the top 20 percent of households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get only four percent of the savings. Borrowers with advanced degrees represent 27 percent of borrowers, but would claim 37 percent of the annual benefit.”

So where does that leave us?

It leaves us, as with any well-intentioned campaign pledge, taking massive proposals like this with a tiny grain of salt. I spoke with Alan Collinge, a longtime student-loan reform activist, who warns to be wary of most anything the federal government promises when it comes to student loans. “Congress has, many times in the past, said to the Department of Education, ‘We’re gonna have this loan-cancellation program,’ but the Department of Education will fight every possible way to disqualify a borrower.” He cites the Public Loan Forgiveness Program, in which “less than one percent of people who thought they were getting that forgiveness are actually getting that. And this is across the board for all the income-based repayment programs where they can forgive your debts after 25 years. I would be surprised if even 5 to 10 percent of people trying for that got it. So these are wolves in sheep’s clothing.”

Collinge is also baffled by the absence of bankruptcy protection and statutes of limitations in Warren’s bill, things he says have been missing from student loans for a while. “The founding fathers demanded bankruptcy rights uniformly in the constitution,” he says. “They demanded it ahead of the power to raise an army and to declare a war. And so this is a predatory debt instrument — whatever cancellation program you might see advertised by the politicians in the media, it’s just nonsense. It’s false advertising.”

And that means this proposal is good or bad?

Debt relief is, prima facie, a good thing, as long as it’s paid for — it would benefit the economy and the (relatively) disadvantaged. The issues are, who stands to benefit most from it, and the opportunity cost (i.e., could that wealth tax be better spent elsewhere, like our insane healthcare system?). These, as is often the case with politics, are largely a matter of personal opinion.