Elizabeth Warren’s Student Debt Forgiveness Plan Is a Really Bad Idea
Democratic presidential hopeful Sen. Elizabeth Warren (D-Mass.) wants to forgive all student loan obligations and make colleges tuition-free for all Americans. She says the $1.5 trillion debt that college grads are now carrying is “crushing millions of families and acting as an anchor on our economy.”
She wants college to be “a basic public good that should be available to everyone with free tuition and zero debt at graduation.” This is the same way that K-12 education is delivered. While we have always viewed education as a public good for children, we have never viewed education as a public good for adults over the age of 18.
What about the cost?
The cost would be staggering. By her calculation, the loan forgiveness cost would be $640 billion. Since she will forgive debt for about 95 percent of the 45 million people with student debt, who owe an average of about $30,000, the cost will likely exceed $1.2 trillion.
The cost of providing free college tuition would be an additional $1.25 trillion over the next decade. Since nearly all Americans believe that the federal government budget deficit is too high, these plans would have to be financed by raising taxes.
Warren would raise tax revenue by creating an “Ultra-Millionaire Tax” — a 2 percent annual tax on all families with $50 million or more of wealth. Her advisers claim this would raise about $200 billion annually, although there is some debate about this figure.
While this may appear to be a good idea, it is just the opposite. This is yet another plan to take income away from those adults who have earned it and give it to able-bodied adults who, for whatever reason, did not earn it. This will tend to slow economic growth.
This is especially true in today’s capital-intensive economy. By overtaxing the wealthy, new capital is reduced since the increased taxes reduce the amount of capital the wealthy have to invest. Less capital means less growth in a capital-intensive, full-employment economy.
Aside from the cost and the overall negative impact on economic growth, the policy would have more negatives. If the government is paying for each student’s tuition, the government would likely impose some restrictions on tuition and likely some other activities.
Many may argue that is good, but placing restrictions on prices and activity always leads to market distortions and a decline in product quality. In academia, that’s a disaster.
More negative impacts
There will be additional negative impacts for each student. In the long run, free college tuition will be very, very expensive. That’s because while in school, the tuition is paid by taxpayers rather than students, but after graduation, the student becomes the taxpayer. For the rest of their working lives, they will be paying additional taxes to cover the cost of currently enrolled college students.
While Warren claims only the wealthy will pay more taxes, this plan, along with the others that Warren has proposed — like “Medicare for All,“ which she claims is a right — will eventually result in middle-class taxes rising.
Even more disturbing about her proposal is the negative impact the plan has on American youths’ general welfare. Traditionally, college is the place where a child transforms into an adult. Part of becoming an adult is learning to shift away from social responsibility, where someone takes care of the child, and toward individual responsibility, where a person learns to take care of themselves.
Once the student sees that the government will take care of the college tuition bill, the student feels less individual responsibility. Starting out in the working world in their early 20s, young adults are expected to understand the concept of individual responsibility. Without that, understanding success is difficult.
Student debt is not really the problem
On average, a college student graduates with about $30,000 in debt, although that figure is rising every year. Since there is a 10-year period to pay back the loans, the monthly payment is about the same as a monthly car payment. That is certainly not crushing debt.
The real problem is not the debt, but rather the income earned. With sufficient income, the size of the debt payment is easily manageable.
The problem is the low income for many college grads mostly because the U.S. economy has been stagnant for more than a decade. In fact, 2005 was the last year that annual economic growth exceeded 3 percent, although growth was 2.9 percent last year. The year 2000 was the last time annual growth exceeded 4 percent.
This long period of economic stagnation has resulted in a lack of opportunities for college grads, resulting in many being underemployed and receiving low wages.
If the economic policy was geared to increase growth to 3 to 4 percent, the underemployed college grads would have higher incomes, and new college grads would have opportunities to earn a high income. If a recent college grad found employment reflecting the value of the degree, a monthly car payment would not be a crushing burden.
Fortunately, the Trump administration’s top economic priority is growth. This year, the White House projects growth to reach at least 3 percent again. In the future, the Trump administration’s policies of low taxes, less regulation, and more freedom, could result in even higher growth. That would easily solve the student debt crisis without a new massive entitlement program.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. @mbusler www.facebook.com/fundingdemocracy