Democratic presidential candidate Elizabeth Warren has a plan to deal with tuition loan debt:
My plan for broad student debt cancellation will:
- Cancel debt for more than 95% of the nearly 45 million Americans with student loan debt;
- Wipe out student loan debt entirely for more than 75% of the Americans with that debt;
- Substantially increase wealth for Black and Latinx families and reduce both the Black-White and Latinx-White wealth gaps; and
- Provide an enormous middle-class stimulus that will boost economic growth, increase home purchases, and fuel a new wave of small business formation.
Naturally, Democratic presidential candidate Bernie Sanders has his own plan to deal with college debt:
When Bernie is in the White House, he will:
- Cancel the entire $1.6 trillion in outstanding student debt for the 45 million borrowers who are weighed down by the crushing burden of student debt. This will save around $3,000 a year for the average student loan borrower.
There are a lot of things wrong with this idea.
For one thing, it’s not an incentive mechanism. Most of the time, when we as a society give money to someone for doing something, it’s because we want to encourage that activity. So we subsidize solar energy to encourage development of cleaner energy sources, and we subsidize housing to encourage home construction and ownership. Subsidizing certain things is usually a way to encourage socially desirable behavior.
But that’s not the case here: Student debt cancellation does nothing to encourage students to go to college because it only affects people who have already been to college. It’s a pure giveaway (that just happens to be going to a bunch of young people who are likely to vote).
Supporters of tuition debt cancellation are quick to argue that debt cancellation would provide an economic stimulus:
The result is a huge student loan debt burden that’s crushing millions of families and acting as an anchor on our economy. It’s reducing home ownership rates. It’s leading fewer people to start businesses.
First of all, we’re not exactly talking about gigantic loans. 45 million people owing $1.6 trillion works out to about $36,000 per person. That’s not a “crippling” debt. Most of the time, when you hear really high numbers, it’s for people getting loans for advanced degrees such as law or medicine. The average college debt is more like financing a well-equipped Ford Taurus.
Keep in mind, too, that people with college degrees tend to earn more money. According to the most recent Education Pays report,
In 2015, median earnings of bachelor’s degree recipients with no advanced degree working full time were $24,600 (67%) higher than those of high school graduates. Bachelor’s degree recipients paid an estimated $6,900 (91%) more in taxes and took home $17,700 (61%) more in after-tax income than high school graduates.
That difference alone is enough to theoretically pay off a $36,000 student debt in a little over two years at peak earnings. Even taking other costs into account — including the opportunity cost of going to college instead of working — a college education is a good investment:
The median four-year college graduate who enrolls at age 18 and graduates in four years can expect to earn enough relative to the median high school graduate by age 34 to compensate for being out of the labor force for four years and for paying the full tuition and fees and books and supplies without any grant aid.
In other words, paying off the tuition debts of college graduates means giving free money to people who are already destined to be financially better off than most.
Furthermore, getting a college education is just one way of investing in your future. There are plenty of small business owners who have spent $36,000 to equip a restaurant or machine shop, or remodel an office. I’m sure they would also benefit if Elizabeth Warren or Bernie Sanders cancelled their debt.
Or what about people who took out loans to pay for college tuition and just now finished paying off their debt? They’ve got to feel cheated by all this. And it’s hard to argue that their case is much different, because I’m sure giving them $36,000 would help them buy a house or start a business too.
We should also consider the classic invisible people: Those who didn’t go to college because they couldn’t afford it. Imagine what it’s like the be a woman who made the prudent decision to stick with waitressing for a few more years only to hear that people who went to college are getting a $36,000 handout. Why shouldn’t she get $36,000 too? She probably needs the money more, and giving it to her would be at least as much of a stimulus as giving it to a college student.
Or for that matter, we could just let taxpayers have the money. All other things being equal, not paying college graduates $1.6 trillion would leave $4900 for every man, woman, and child in the United States.
I should note that there is one group of people for whom debt cancellation makes some sense: People who went to college but did not graduate. These people are seriously screwed, because they’ve got the debt — for the cost of however many years as they went to college — but they don’t receive any of the benefits that come with earning a degree. And unlike college graduates, these people really are likely to be poor, so getting out from under the debt will be a serious struggle.
It’s almost like we need a debt cancellation program that is targeted to these people. Maybe some sort of means-tested program, that only cancels their debt if they really are having difficulty paying it down…
Of course, the U.S. already has such a program. It’s called bankruptcy. When someone has debts they can’t pay, declaring bankruptcy allows them to get out from under the debt and move on. The lender does take a loss when a debtor declares bankruptcy, but if the debtor was never really able to pay the loan, then the lender is really just recognizing a loss that has already occurred. And the great thing about bankruptcy is that it works for everyone who’s in debt over their head, not just college students.
Although, actually…college tuition loans are one of the few debts that cannot be discharged through the ordinary bankruptcy process. A series of murky changes to bankruptcy law since the 1970s have made it much harder to get out from under student loans. It can be done, but the process is poorly defined and applicants are unlikely to succeed.
While I question the wisdom of giving gobs of money to college graduates, I think it makes no sense to block people with tuition debt from having the same bankruptcy protections as everyone else. The good news is that there’s actually a bill that would fix this problem. It’s the Student Loan Borrower Bankruptcy Act of 2019, which is supported by both Sanders and Warren. Let’s use the debt protections we have, rather than inventing expensive new ones.
The problem with the bankruptcy solution is that the “non-dischargeability” keeps the rates lower than they would otherwise be; is there any estimate what rates would be without this? I’m thinking high enough that it would be a big time problem.
I think the best solution is to put the colleges on the hook somehow; the clearly benefit but have no skin in the game. Maybe make them limited co-signers; this would give them incentive to look after the students’ best interests, even the ones who don’t graduate.
I’m pretty sure the colleges are a huge part of the reason we have this problem. I’m not entirely sure how it works, but it just follows from asking “Who benefits?” It’s pretty clear the colleges are getting a lot of money out of this. Tuition is much higher, even adjusted for inflation, than it was when I was in college.
Interesting point on non-dischargeability affecting rates. That sounds right. I think it would also affect availability of loans, since lenders would scrutinize borrowers a lot more carefully before loaning them money. On the other hand, maybe the squeeze on loan dollars would force colleges to tighten their belts and reduce tuition. But I worry the transition would be painful.I don’t think getting out of this problem will be as easy as getting into it.
Most professional accreditation in Canada requires that the professional not have declared bankruptcy, and we also do not allow student debt to be discharged with bankruptcy.
This is because before these rules came into place around the 80’s – 90’s, it was common practice to run up huge amounts of student debt, get a degree, get professionally credited, declare bankruptcy and run away with a ticket to higher pay alongside a tarnished, but empty ledger… Tarnished, only for seven years until your credit beacon recovered and you could move on with the rest of your life hundreds of thousands of dollars to the better.
The people who are just getting their degree, especially master’s level degrees, generally have somewhere between little and no incentive not to stick the lending agencies, without something preventing them from doing so…. And that’s not hypothesis, it was reality.
That said… I agree that people who failed to actually attain their degrees are humped, and would be open to figuring something out for them.
I didn’t know that about the Canadian bankruptcy experience. Interesting.
The thing is, in order for the loan system to work, there needs to be some way to discipline the process, so that loans are tied to the value of a degree. You may find classical Greek literature absolutely fascinating, but getting a degree in it will probably not help you pay off a loan. On the other hand, getting a law degree can pay very well, but it won’t help you pay back the tuition loan if you drop out of pre-law in the third year. The lenders won’t bother to make these distinctions unless they have skin in the game.
Maybe something more sophisticated is needed. I could see a tuition lending market where lenders are reluctant to give loans to students who haven’t completed at least, say, two years of education to prove they are capable. Colleges would then have an incentive to offer the first two years at a reduced cost, since students would have to save money to afford them. Hmm.