"[My plan] forgives all student debt and ends the absurdity of sentencing an entire generation to a lifetime of debt for the 'crime' of getting a college education."-- Bernie Sanders
"The result [of rising college costs] is a huge student loan debt burden that's crushing millions of families and acting as an anchor on our economy."-- Elizabeth Warren
The rhetoric of these two Democratic presidential candidates does not match reality, particularly for recent college graduates.
First, out of 44.9 million millennials (ages 25-34), only 15.3 million have student debt. In other words, 66 percent of that cohort have no student debt at all, either because they haven't gone to college or because they managed to get through without borrowing.
Second, those millennials who do have debt tend to have modest burdens relative to their income. As of 2017, typical four-year college graduates had accumulated $28,500 in debt over the course of their college careers. Current federal loan repayment programs enable graduates to pay back their loans with monthly payments of less than $200. This is a relatively small share (4%) of the average monthly earnings for the millennial population ($4,717).
Third, borrowers who find their loan payments unaffordable because of low earnings are eligible to make reduced payments without any penalty and to have truly unaffordable balances forgiven. Existing loan repayment safety-net programs cap monthly loan payments at 15% of discretionary income, regardless of how much students borrowed. The repayment schedule for all federal student loan programs is income-driven. Any balances remaining after 20 years are forgiven (or 10 years for the approximately one-quarter of the workforce employed in the nonprofit sector or in government).
Fourth, only 6 percent of millennial borrowers owe more than $100,000. These borrowers tend to have graduate or professional degrees (medicine, law, research) that will earn them more. In 2017, the average annual income for millennials with master's or professional degrees was $74,480 and $89,006, respectively. These higher incomes make larger loan payments feasible, while still leaving them more discretionary income.
Fifth, typically, those who are having difficulty repaying their debt are not the ones with high debt but those who never completed college. Default rates are highest for those with less than $5,000 of debt.
In brief, for those millennials who did borrow, the amount they owe is generally modest relative to the value of their education. College graduates can expect to earn about $1 million more than non-college graduates over their working years, which should make loan repayments affordable. In addition, existing Federal programs are designed to keep monthly payments affordable as well as forgive onerous debts.
But candidates Warren and Sanders still don't think the federal government is generous enough. They want to cancel all or most of student loan debt, not just for recent graduates but for all 44.7 million people owing student debt across the population, the total of whose outstanding loans came to $1.47 trillion as of 2018. Thirty-eight percent of that total is for graduate and professional degrees, the recipients of which, as already noted, should be more than capable of repaying debt with future earnings.
Warren's proposal includes: cancellation of $50,000 in federal student loans for every person with household income under $100,000; substantial debt cancellation for every person with household income between $100,000 and $250,000; allowing income from student loan cancellation to be non-taxable; making private student loan debt eligible for cancellation; and streamlining the existing student loan debt-forgiveness process.
The debt forgiveness Warren proposes would amount to a one-time cost of $640 billion. Warren expects to pay for this with an Ultra-Millionaire tax, a 2 percent tax on 75,000 families with $50 million or more in wealth, not just income. Not only is such a tax unconstitutional, since the Constitution forbids the imposition of "direct" taxes on individuals (other than income taxes), it is also unenforceable. The federal government has no way of ascertaining the value either of privately-owned businesses or of tangible assets such as art, yachts, luxury cars (into which a wealth tax would impel the rich to move assets). It would have a ruinous effect on the economy by deterring the wealthy from investing in publicly held companies, mutual funds, and even bank accounts. Thus it would reduce national employment (hence the earnings of the very college graduates she purports to help, among others) and the source of the income on which Warren and other self-styled progressives would otherwise wish to increase taxes. (For details on these points, see David L. Bahnsen, "The Wealth-Tax Horror," Commentary, February 2020, 24-29).
In addition, Warren proposes to eliminate tuition and fees at every public two- and four-year college. She also wants to expand Pell Grants for living expenses for low-income students by $100 billion and create a $50 billion fund for historically black colleges and universities (HBCU) so as to enable them to enroll more minority students -- even though enrollment at those colleges has been declining largely because minority students increasingly prefer to attend other institutions. Warren estimates that these funds plus the cost of free college to anyone who wants to attend would be $1.25 trillion over 10 years. She expects the cost of tuition and fees to be split between the federal government and the states (that is, federal and state taxpayers) thereby reducing spending on vital services (public education, public safety, infrastructure) provided by state and local governments, most of which are required to balance their budgets.
Warren believes that her student loan forgiveness program will serve as a middle-class stimulus for economic growth by increasing home purchases and fueling small business formation. To the contrary, her plan, which is one of many proposals for increased federal spending that she has offered during her campaign, is exorbitantly expensive and could not be paid for (as David Bahnsen notes) without greatly increasing the number of individuals paying the wealth tax, thereby reducing business investment and economic growth. In addition, her proposal undermines the value of hard work and personal responsibility.
It's a slap in the face to those who've saved and made sacrifices to pay for their and their children's education -- as an irate father pointed out to the senator at one of her rallies. It is also patently unfair since debt cancellation favors one class of students over those who never took out loans; rewards well-off students at the expense of lower-income ones (since student debt, according to the Urban Institute, is concentrated in the top quarter of income distribution), and above all, requires those who never went to college to finance the education of those who do. As a result, college loan forgiveness will increase income inequality, which for Warren and Sanders is the greatest problem facing the nation. This sort of income redistribution undermines the very raison d'être of their candidacies.
--Roberta Schaefer is the founder and former president of Worcester Regional Research Bureau.
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