When it comes to offering polices that target American inequality, Sen. Elizabeth Warren (D-Mass.) is on a tear. So far, the Democratic presidential contender’s proposals have taken on wealth concentration, affordable child care and the excessive power of dominant companies. On Monday, she introduced a proposal to significantly reduce the stock of outstanding student debt.
Her plan would cancel as much as $50,000 in student debt for those in households with income less than $100,000. For student debtors in higher income households, the $50,000 figure falls by $1 for every $3 in income. So, someone in a $150,000 household would be eligible for about $33,300 in debt forgiveness, which is still above the average debt level for those with a bachelor’s degree (about $30,000). The plan phases out for families with incomes above $250,000.
According to Warren’s materials, her proposal would reach more than 42 million Americans, or 95 percent of those owing student debt. The $50,000 is enough to achieve complete debt cancellation for more than three-quarters of student debtors.
Why not just cancel all student debt and be done with it? Because, as journalist David Leonhardt argues, that’s not as progressive an idea as it sounds. The problem is that the “the highest-earning quarter of the population holds about half of all student debt ... which means that universal student debt cancellation would be a giant welfare program for the bourgeoisie.”
The Warren plan expends resources on student debtors from upper-income families, but it is still broadly progressive. Analysis from experts at Brandeis University, the University of Tennessee, and Arizona State University shows that among low and moderate-income families — those in the bottom 40 percent of the income distribution — close to 90 percent of borrowing households would have their student debt wiped out compared to just under 30 percent of those in the top 10 percent. Similarly, the proposal provides total cancellation for about 90 percent of those with an associate degree or less but provides total cancellation for about only 25 percent of those with a professional degree or doctorate. (Because student debt rises with household income, the plan could be made more progressive and less expensive by lowering the $50K cancellation amount).
This is especially important from a racial perspective. The large and persistent racial wealth gap, historical discrimination and unequal access to housing in places with decent public schools all help erect steep barriers to college completion for African Americans, which in turn lowers their economic mobility. Black college students are half as likely to graduate without debt (only 14 percent do so), their debt levels are higher, and too many suffer a particular harsh outcome in this space: they leave college without finishing, meaning they have the debt but not the degree (the debt burden itself is a factor in this outcome). As a recent Wall Street Journal front-page article revealed, even students at historically black colleges, institutions with a clear mission to correct the inequities noted above, are now beset with disproportionate loan burdens.
According to Brandeis and other researchers, Warren’s proposal would, by reducing the indebtedness of minority households with student loans, significantly raise the ratio of black/white wealth in such households from about 3 to about 28 percent, and the white-Latino gap from 54 to 81 percent.
Who wins and who loses from progressive debt cancellation? Since more than 90 percent of student debt is now public (the government is the lender), loan cancellation shouldn’t hurt private lenders, especially since the proposal doesn’t cancel private debt (instead, it works with the borrower and the lender to allow the government to pay off the outstanding debt). Research has found the economic benefits of student debt reduction to be net positive, driven by higher net worth and findings that connect student debt to reduced homeownership and lower business formation. Private-sector debt servicers get dinged by the plan, a case of a (relatively small) sector getting hit by a policy-induced, structural change. Also, those who have paid off their loans might well feel left out.
This price tag for this one-time debt cancellation will cost around $640 billion, about 3 percent of GDP and close to what we spent on defense last year. Is it worth it?
In fact, while the student debt problem is invariably described as a “crisis,” some experts view such labeling as overwrought. Higher education expert Sandy Baum, for example, convincingly argues that even with the debt they’ve accrued, most college grads “… are better off than they would have been if they hadn’t borrowed and hadn’t gone to college.” And there’s compelling evidence that even with loans, investment in higher ed reliably pays off in terms of future earnings. Moreover, around a third of families pay an affordable share of income to service their investment in higher ed and cancel outstanding balances after 20 to 25 years (Baum has long advocated for simplifying and expanding income-based repayment plans).
At the same time, while the polling data varies a lot, there’s evidence that especially younger people are increasingly questioning the value of college, and this certainly relates to the loan burdens that too many students take on. (One recent poll finds that “more than 40% of millennials and Gen Xers say their student debt probably, or definitely, was not worth the loans.”)
This split creates a serious problem. On one hand, one of the strongest messages society and policymakers promulgate is “go to college!” On the other, the intersection of two long-term trends — stagnant incomes and rising tuitions — make it hard for less advantaged families to follow this advice. Warren’s plan is an attempt to fix that disjunction.
That one-time fix must include measures to prevent ending up back here again, and the other part of Warren’s proposal aims to restructure higher ed so that it doesn’t require so much debt accumulation. That too makes sense. Americans have long agreed that 12 years of education is a public good. But that number — 12 — is clearly outdated. For people to compete in today’s economy, they’ll need more schooling. We can and should argue about whether the right number is 14 or 16. But it’s not 12.