Magazine | October 14, 2019, Issue

Elizabeth Warren’s Bad Student-Debt Plan

Elizabeth Warren speaks about canceling student-loan debt, July 2019. (Win McNamee/Getty Images)
It’s too costly and would create a moral hazard, when there are better alternatives

Senator Elizabeth Warren promises to cancel outstanding student debt for a majority of borrowers if she is elected president. Her campaign pegs the price tag for this scheme at $640 billion, though independent estimates suggest the true cost could be as high as $955 billion. Such a proposal is sure to win fans among the Democratic voter base, but as a policy it’s inefficient and unfair, and it creates serious moral-hazard problems.

Before we get into those defects, it’s worth acknowledging that the proposal could be worse. Unlike Senator Bernie Sanders, her rival in the Democratic presidential primary, Warren does not want to cancel all $1.6 trillion of outstanding student loans. Rather, she wants to cancel up to $50,000 in student debt for everyone earning below $100,000 per year, and to cancel smaller amounts for those farther up the income ladder.

This is a tacit admission that student-debt cancellation is a fundamentally regressive policy. Since borrowers take on student debt to pursue education, and more education is associated with higher incomes, it follows that a blanket cancellation of all student debt would disproportionately benefit wealthier people. The largest handouts would go to those with lucrative graduate and professional degrees. 

To her credit, Warren at least partially addresses this issue by capping loan forgiveness at $50,000 and scaling it back for those with the highest incomes. That shaves several hundred billion dollars off the cost of universal student-loan cancellation. But those tweaks don’t negate the underlying problem: People with student debt tend to be better off than the average American.

Even with the income restrictions, households in the top 40 percent of the income distribution would capture nearly two-thirds of the debt relief under Warren’s plan, according to Adam Looney of the Brookings Institution. Moreover, since people have more student debt when they are young and at the start of their careers, many “lower-income” beneficiaries of Warren’s plan would eventually move up into richer groups.

In addition, the plan treats people in similar economic situations differently. Two people earning the same income would receive wildly different benefits from the federal government if one happened to have student debt and the other did not. Imagine two people earning $40,000 per year: a childless, 25-year-old recent college graduate and a 40-year-old with two children who never went to college. Why is the first more deserving of taxpayer munificence?

With $955 billion in taxpayer money, Warren would shower greater benefits on upper-middle-class households than on those below, and deliver lopsided payouts to households within the same economic stratum. If the federal government had $955 billion lying around, it would be fairer and more efficient simply to drop that money out of helicopters.

Of course, the sad fact is that the federal government does not have $955 billion lying around. So Warren proposes to pay for student-debt forgiveness with a wealth tax on high-net-worth individuals, which her campaign claims would raise $2.75 trillion over ten years. Warren has said that her wealth tax would pay not only for her student-debt-cancellation plan but also for free public-college tuition, universal child care, universal pre-K, and part of Medicare for All and the Green New Deal, among other things.

But many economists — including Lawrence Summers, an official in the Clinton and Obama administrations — believe that Warren’s wealth tax would raise less than half the revenue she claims. Kyle Pomerleau of the Tax Foundation notes that most developed countries with wealth taxes have scrapped them owing to enforcement challenges. Whether Warren could find the money to pay for student-debt cancellation, let alone her other promises, is very much in doubt.

Even if Warren succeeded in implementing her loan-cancellation plan, no one should assume that it would be the last time the federal government forgave student debt. Borrowers wouldn’t. Once America set a precedent for blanket student-loan cancellation, it would be natural to assume that it was the start of a pattern.

Knowing there was a decent chance their debts would be canceled at some point in the future, students might happily decide to borrow more. Non-borrowers would turn into borrowers, and people would pursue advanced degrees they didn’t need, in order to exploit the future loan-cancellation bonanza. Colleges would hike tuition, knowing that the expectation of future loan forgiveness was baked into students’ decision-making. Borrowers would repay their loans more slowly, if at all.

To be fair: Warren also proposes making public colleges and universities tuition-free, to reduce students’ need to borrow. But an analysis by Sandy Baum and Michael McPherson of the Urban Institute shows that students at public colleges who qualify for zero tuition today still borrow an average of $24,000 in student loans (to pay for living expenses). Moreover, free public college would not lower the tuition bill for the 5.2 million students who attend private colleges; most of them borrow to do so. There’s no evidence whatsoever that free public-college tuition would eliminate new student debt.

Though Warren also envisions a modest expansion of the Pell Grant, a means-tested aid program that students at both public and private colleges can use, the expansion would cover only a fraction of the $93 billion in federal student loans issued each year. Additionally, there’s no guarantee that students would use expanded Pell Grants as a substitute for loans rather than a complement — especially with the temptation of another round of loan forgiveness sometime in the future.

Neither free college tuition nor expanded Pell Grants would have any effect on students who borrow for graduate school. They account for a greater and greater share of the $1.6 trillion in outstanding student debt. Unlike undergraduates, graduate students can borrow unlimited amounts from the federal government. Half of all students in professional fields such as law and medicine borrow more than $100,000 for their degrees, thanks to the blank check from Uncle Sam. That number is sure to soar with an implicit promise of future loan cancellation.

Warren could solve this moral-hazard problem in one stroke, if she were also willing to stop the federal government from making any new student loans. But as that would enrage America’s powerful higher-education lobby to no end, such an addendum to her plan is unlikely to be forthcoming. Without it, blanket debt cancellation would lead to higher borrowing, further inflation of college costs, and a drop in loan-repayment rates as borrowers and institutions positioned themselves to exploit the expected second round of debt forgiveness.

None of this is to deny that some people are struggling to pay back their student loans. But such cases are rarer than you might think. Contrary to the popular impression that student borrowers are stuck with a ball-and-chain of debt for a lifetime, 70 percent of borrowers pay off their student loans within ten years. Those who pay them off at slower rates typically have advanced degrees; while their balances are larger, they also have higher incomes.

But even for those who truly struggle to repay their debts, outright loan cancellation isn’t necessarily the right answer. The most obvious reason is that forgiving the debt of borrowers who fall behind on their payments would encourage more borrowers to fall behind. Policy programs involving loan cancellation almost always lead to moral hazard.

Repayment plans already exist that can offer struggling borrowers lower monthly payments than the standard plan, but surveys show that fewer than half of undergraduates even know of these programs. A responsible student-debt agenda would focus on increasing awareness of such lifelines before embarking on a trillion-dollar loan-cancellation adventure. Such an agenda should also aim to cut away the thicket of fees and regulations governing how borrowers who fall into default on their student loans can get back into good standing. While such a policy wouldn’t easily lend itself to catchy campaign slogans, it is a practical and fiscally responsible way to address the problems some student borrowers face.

Elizabeth Warren’s scheme for student-debt cancellation would solve few problems. It would consume scarce taxpayer dollars, create a massive moral hazard, dole out government benefits less efficaciously than a helicopter drop, and distract attention from commonsense solutions to ease the burden of student loans. If Candidate Warren is destined to become President Warren, let’s hope she drops the student-debt radicalism in favor of more pragmatic approaches before she reaches the Oval Office.

This article appears as “A Misguided Plan for Student-Debt Cancellation” in the October 14, 2019, print edition of National Review.

Preston Cooper — Mr. Cooper is a higher-education analyst based in Washington, D.C.

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