Bernie Sanders and Elizabeth Warren are promising massive cancellation of student debt. There is around $1.5 Trillion in outstanding educational debt and 1-in-8 Americans are currently paying off educational loans. These loan forgiveness plans are promoted in the name of fairness, broader opportunity for the middle class and working class, and reducing inequality. The costs of these programs will, ostensibly, be paid for with taxes on Wall Street speculators and the very wealthy. The reality behind the rhetoric, however, is that Sanders’ and Warren’s plans are a massive give-away to rally support among college-educated millennial voters. The funds used to pay for these programs could be used in much fairer and more equitable ways.
The average total debt for borrowers who graduate from a public university is less than $28,000. The average monthly student loan payment is $393 and the median is $222. The news stories that feature graduates mired under $100K+ in debt are not representative. In addition, the wages for college graduates are much higher than for non-grads. For most college graduates, their loan payments are manageable in light of their higher incomes.
About 51% of total educational debt is held by households in which at least one member has an advanced degree (beyond a 4-year B.A. or B.S.). This figure is even more striking when you consider that about 35% of Americans aged 29 or older have a B.A. or B.S. In other words, the majority of debt is held by a minority of the population who have both 4-year and graduate degrees.
Under Sanders’ plan, all student debt would be forgiven and public colleges and universities would be tuition-free for undergraduates on a going-forward basis. Anyone who graduated from Harvard, Stanford, Yale, or any other expensive private school for undergraduate or graduate degrees prior to 2020 would have all of their loans forgiven. People who attend any of these schools in the future would still be on the hook for the costs of attendance. For the purposes of attracting millennial voters in the 2020 election, however, the costs to future generations of students are not the concern.
Warren’s plan attempts to make debt forgiveness fairer to middle-income households by applying a diminishing benefit to higher-income graduates. Even so, Brookings Institute estimates that fully 27% of the economic benefits from Warren’s plan would go to households in the top 20% by income and another 38% would go to households in the next-highest-income 20%. Putting this another way, only 34% of the economic benefit would go to households in the lowest 60% of income. For Sanders’ plan, the benefits would flow even more to wealthier households because the forgiveness is universal, with no diminished benefit for high-income households.
Sanders and Warren claim that they have plans for taxes on Wall Street (Sanders) and the wealthy (Warren) that will pay for student debt forgiveness, so that the costs will not require higher taxes on the middle class. There is a logical fallacy in these arguments. Assuming that it was possible to raise the $1.5 to $2.5 trillion that college debt forgiveness and free college are estimated to require, is college debt forgiveness the best or fairest way to spend the money? This large a sum of money could have a massive impact in many different areas of society. Why not subsidize mortgages for low-income households or pay for a massive job training program for laid-off manufacturing workers?
There is little question that college debt is a problem, but we need solutions that are equitable to people who don’t attend college as well as to those who have made less-expensive choices in getting educated. And, of course, there is the population of people who have already sacrificed to pay off their loans. Why are they less worthy than recent graduates?
Geoff Considine on Finance and Economics 