The student debt crisis reentered the news cycle Monday (has it ever really gone away?) when Sen. Bernie Sanders released a proposal to cancel all existing student debt while making all public higher education free.
The headline writers’ instant treatment of Sanders’ plan was that he was one-upping Elizabeth Warren, his nearest progressive rival in the race for the Democratic nomination for president. Warren announced her own plan to eliminate student debt back in April, and Sanders goes further than she did.
That’s too narrow a focus. The reason we should care about these proposals isn’t because they indicate who’s got superior progressive credentials. It’s because the student debt crisis is genuine, it disproportionately burdens lower-income families, and eradicating student debt will have an immense and lasting stimulative effect on the U.S. economy.
Minority borrowers take on more debt and have more trouble paying it off.
According to a report issued last year by the Levy Economics Institute of Bard College, eliminating or reducing the student debt burden will increase consumer spending, expand home ownership, increase job creation and reduce unemployment. These effects would be persistent, as opposed to the one-time sugar high produced by the Republican tax cut of 2017, the benefits of which (mostly to the top 1%) already are fading.
Let’s take a look at the rationale for eliminating student debt and examine why the standard objections to the idea don’t hold water.
It’s hard to imagine a weaker objection. By its logic, we wouldn’t have Social Security or Medicare today. The argument would be: “My great-grandparents almost starved to death in old age and died in the street because they couldn’t get healthcare, so why should yours get a break?”
The point is that the sacrifices families made to shoulder their debt burden brought home the folly of forcing families to impoverish themselves to attain higher education. Why should we want to force the same conditions on future generations?
Another objection with at least a superficial logic is that a program to cancel student debt will necessarily be regressive, benefiting the wealthy more than the working class.
It’s true that wealthy borrowers tend to have higher student loan balances in absolute terms. But that’s the wrong figure to look at, the Bard economists say. What’s important isn’t the loan balance, but the loan burden — debt, and debt repayments, as a proportion of income. By that measure, lower-income students are massively overburdened, and debt relief would be distinctly progressive.
The statistics on that are clear. Economist Mike Konczal of the Roosevelt Institute cites a 2014 speech by Janet L. Yellen, then the Federal Reserve chair, who observed that since 2001 college costs had become “especially burdensome for households in the bottom half of the earnings distribution.”
The Fed’s data showed that average education debt as a percentage of average income had risen to nearly 60% in 2013 from about 25% in 1995, while for the top 5% the percentage had remained roughly steady at about 8%. The highest burdens are shouldered by black and Latino borrowers.
The Bard survey adds that the picture of the typical borrower has changed dramatically in recent decades. Borrowers were once “traditional students,” the survey notes — those attending private universities and professional schools without a break after high school, “often with a family history of higher educations and with the family wealth to accompany it.”
Today, they’re more likely to be nontraditional students, “often beginning later in life and without a family background of college attendance.” They’re more likely to opt for public higher education, which has been systematically deprived of state support and thus has become more expensive for students over time.
“Minority borrowers,” Bard says, “take on more debt and have more trouble paying it off.” For them, borrowing for college tends to widen racial disparities in the credit and job markets, producing lower family wealth. The student debt crisis, in other words, is both an artifact of and contributor to wealth inequality in America. What’s worse, a high student debt burden makes those borrowers much more vulnerable to the effects of an economic downturn.
The cancellation of student debt, the Bard paper calculates, could add as much as $108 billion a year to economic growth — and it would be broad-based, as opposed to the narrow advantages offered by the tax cut. To summarize, “Student debt cancellation could generate substantial stimulus effects…, while improving the financial conditions of households.”
What remains is to consider the details of a cancellation plan. In unveiling her proposal, Warren was sensitive to the criticisms that the wealthy would be relieved of their debtor obligations just like the non-wealthy, and that the highest debt balances were incurred by medical- and law-school students, who would have a better-than-average chance of paying them back.
Accordingly, she proposes to phase out loan forgiveness starting with households with income of more than $100,000, eliminating it entirely for those earning $250,000 or more. She would cap the forgiven loans at $50,000, which would limit the break for doctors and lawyers.
Sanders would eliminate all existing debt for everyone. He would cap the interest rate on future undergraduate loans at 1.88%.
Both candidates would eliminate tuition and fees for public higher education institutions and offer assistance to historically black colleges and universities. Sanders estimates the cost of his program at $2.2 trillion, including the elimination of $1.6 trillion in existing debt. Warren says her program would incur a one-time cost of $640 billion in debt extinction, plus an additional $610 billion over 10 years to make public higher education free.
Both propose to get the money effectively by raising taxes on the wealthy — Warren from her “ultra-millonaires tax,” which would impose a 2% annual tax on household net worth between $50 million and $1 billion and an additional 1% on fortunes above $1 billion, raising $2.75 trillion over 10 years. Sanders proposes a transaction tax on stock, bond and derivatives trades, which he estimates would produce $2.4 trillion over 10 years.
What both plans have in common is a recognition that higher education has become a must for economic mobility in our society. The old saw that every dollar spent on college returns two to five bucks in earnings has become less true over time, as the annual earnings even of college graduates have stagnated and the debt burden has eaten away at the gains.
But both these plans would do much to restore the ability of all American students to reap the benefits of higher education. It’s all right to bicker over the details, as long as the fundamental concepts remain in place.