Earlier this year, Elizabeth Warren made headlines by announcing a plan to forgive student debt for most borrowers, up to $50,000. The plan earned praise from many on the left and criticism from many on the right.
Bernie Sanders entered the discussion by making a large student debt forgiveness proposal of his own: all student debt would be cancelled if he was elected president.
Either plan becoming a reality would be life changing for many student loan borrowers. It would also be very expensive to the US Treasury and the American taxpayer.
As a student loan borrower, I’ll be the first to admit that I would love it if these plans became reality. I’m also of the opinion that cancelling student debt will provide a major boost to the economy, not just student loan borrowers. Most importantly, I find it to be an appropriate solution to decades of poorly managed higher education policy.
That being said, I have major concerns about the chances of these proposals ever becoming a reality.
The good news is that both of these plans can be made less expensive and more likely to pass.
The Things Warren and Sanders Get Right
Fixing Public Education – Long ago, our society decided that a high school education was necessary for most of our citizens. Due to this necessity, we set out to provide a quality public education to all. This move didn’t eliminate private schools, but it provided an education to everyone who wanted one.
Today, the minimum required education for many jobs is now a four-year degree. If we require many of our citizens to have this level of education, we ought to make it available to everyone. Both Sanders and Warren are calling for free public education at four-year schools. The idea isn’t to put private colleges and for-profit schools out of business. The idea is to put a free public alternative in the market. People will still borrow money to attend private schools like Harvard and Yale, but the for-profit institutions will have to provide a better product, or they will go out of business.
Not all students will select a free education, but it will allow the government to get out of the student loan business, and it will prevent a future student loan crisis. Best of all, the next generation of American workers can get the education they need without facing a lifetime of financially crippling student loan debt.
The reason this particular step is necessary is that it allows the possibility of a one time fix in student loans. Critics of student loan forgiveness make the point that there is a danger of future students expecting that their loans will also be forgiven. By combining student loan cancellation with a free public education, the moral hazard is eliminated.
Tackling Private Student Debt – Most of the $1.6 trillion in student debt is owed to the federal government. However, the biggest student loan nightmares are usually found with the people who have private student loans. These loans don’t come with consumer protections like Income-Driven Repayment plans and they are nearly impossible to discharge in bankruptcy. The borrowers hit hardest in the student loan crisis normally point to private loans as their biggest issue and the Warren and Sanders plans would help these borrowers.
Fixing Federal Bureaucracy Issues – Servicing of federal student loans has been a mess. The loan servicers paid by the government to manage the debt and assist borrowers have failed. This failure has led to numerous lawsuits brought by borrowers, various states and even the federal government. Worse yet, borrowers have been given bad information that can cost thousands of dollars. Wiping the slate clean and erasing years of federal mistakes and borrower hardships is a great way to fix the existing mess.
Not Taxing Forgiven Student Loans – A major issue for many types of student loan forgiveness is that the forgiven debt is treated as income by the IRS. This means a student loan debt problem becomes an IRS/tax issue if the debt is forgiven.
Where Warren and Sanders Potentially Made Mistakes
Sanders Went Too Far – If Congress debates the Sanders plan, critics will point to the doctors and lawyers that received expensive educations and now are earning large incomes. They will argue that the plan is helping the people who are already well off. Why should tax dollars from construction workers and teachers be used to pay off the student loans of a wealthy doctor? The criticism might be unfair, but it will certainly be argued. Getting such a plan approved by Congress would be a tough sell and might not even be possible. Many might point to Warren’s plan, which is specifically designed to cap the amount of student loans forgiven and limit the aid to those who are not earning massive salaries.
Warren Goes Too Far and Not Far Enough – Many have already opposed the Elizabeth Warren plan as being unfair to those who didn’t attend college. They will argue that the plan is too generous. Others will argue that the cap of $50,000 per borrower means that many who really need the help won’t get the assistance they really need. Borrowers who have six figure student debt and no job might be helped on paper, but the Warren plan would do little to help their situation. The six figure club includes many students who attended for-profit colleges and who face dismal employment opportunities. To be fair, Warren’s plan would help most student loan borrowers, but many desperately in need of help would see their circumstances unchanged.
Calling it Student Loan Forgiveness – The term student loan forgiveness makes it easy for critics to call it a government handout. While this characterization grossly understates the hard work put in by the former student and the benefit to society of having a well educated workforce, the criticism will probably stick.
However, there is room for a compromise…
Fixing the Plans to Eliminate Student Loan Cancellation/Forgiveness
If student debt cancellation is ever going to become a reality, a compromise will likely have to be reached.
One option would be to replace the current confusing federal repayment plans with a simple income driven plan. Borrowers pay 10% of their discretionary income for 10 years and then the debt is considered to be paid in full.
The government can also stop charging interest on student loans. A borrower who took out $30,000 in student loans will pay 10% of their discretionary income towards their debt until 10 years have gone by or until they have paid a total of $30,000.
Because these payments are based upon the borrowers earnings, the IRS could be tasked with collecting the money at tax time, which would eliminate the need for student loan servicers.
Going this route would ensure that all student loan borrowers who need the help receive assistance. Everybody pays their fair share.
Such a plan wouldn’t be nearly as nice as the ones proposed by Warren and Sanders, but the compromise might have the best shot at becoming reality.