Sen. Elizabeth Warren’s Student Loan Forgiveness Proposal
The student loan crisis is taking center stage in the 2020 presidential election campaign. The numbers are attention-grabbing: student loan debt is now the second biggest form of outstanding consumer debt. With more than $1.5 billion in student loans debt outstanding, education debt eclipsed credit card debt almost a decade ago. Only mortgage debt is greater. Seven out of 10 students who graduated in the Class of 2018 left school with student loan debt, graduating with an average of $29,800 in loans in their own names. Additionally, 14 percent of them had parents who took out federally guaranteed Parent PLUS loans, averaging $35,600 each. Earlier this month, President Trump rolled out a proposal, which we wrote up here.
The Warren Student Loan Forgiveness Plan
Elizabeth Warren, the Senator from Massachusetts, has announced a more aggressive — and expensive plan that would extend up to $50,000 in outright student loan forgiveness to Americans with incomes up to $100,000 per year, and then gradually phasing out, with loan forgiveness reaching zero for Americans earning $250,000 per year or more. Under the plan, the federal government would take over all outstanding loans up to $50,000 per person and pay them off outright.
Unlike current loan forgiveness programs other than for public service, Warren’s plan would make loan forgiveness tax free for the recipient. If enacted, Warren’s plan would cancel student loans for about 95% of current borrowers.
The Warren plan would also extend to private student loan debt. Her campaign published a more thorough discussion here.
Other Warren proposals include:
- Committing an additional $100 billion to Pell Grants over the next decade;
- Expanding Pell grant eligibility to include more lower- and middle- income students;
- Allowing Pell grants to cover non-tuition costs such as books and housing expenses;
- Making all undergraduate tuition at public colleges fully-paid for by the government.
The estimated cost to the taxpayer would about $640 billion up front, and another $640 billion over the next ten years spent to make public colleges free.* To pay for it, Warren proposes enacting a 2% annual wealth tax (not an income tax) on households with net worths of $50 million or more. For the few households with net worths exceeding $1 billion, Warren proposes enacting an additional 1% annual wealth tax, for a total of 3%.
Warren believes that this tax would raise $2.75 trillion over ten years. However, other analysts estimate that her wealth tax would actually raise just 40% of that amount, at most.
Warren’s plan has drawn a number of criticisms – and many of them are coming from the left, not the right.
First, the plan is regressive. It primarily benefits wealthy and affluent families, with very limited benefits going to families struggling most. According to an analysis by the Bookings Institution, 66% of the benefit would go to the top 40% of income earners. Borrowers with advanced degrees make up 27% of student loan borrowers but would get 37% of the benefit.
The poorest quintile of earners would get only 4% of the benefit. The second lowest quintile of earners would get only 10% of the benefit. The poorest 40% combined would only get 15% of the benefit. The poorest 60% would get 34% of the benefit. The big winners in the plan will be white-collar professionals, middle managers, lawyers, and journalists.
Others say that Warren is significantly underestimating the cost of the plan. The Urban Institute pegs the real cost of Warren’s debt forgiveness plan at $955 billion. That’s in addition to the $640 billion over the next ten years that it will cost to make public colleges tuition-free for students.
, the plan doesn’t sit well with some people who sacrificed for years to pay off their own student loans and their children’s student loans, or who paid cash for their education and their children’s education.
The plan also means plumbers, tradesmen, and welders who didn’t borrow large sums of money are ultimately forced to subsidize those who did – though this objection is somewhat blunted by the plan to pay for the forgiveness by taxing the wealthiest 50,000 households in the country.
The Wealth Tax
But there’s a non-zero chance that Warren’s wealth tax will get struck down in court. Legal challenges to the wealth tax could take years. If it fails, then the rest of the taxpayers will be left holding the bag.
Warren’s plan also assumes that the wealthiest families in America, with the most resources available for tax planning, would simply allow themselves to be taxed.
For example, a tax on net worth would encourage massive borrowing against assets. This would reduce net worth, as equity in property and other assets are offset by new debt. When the wealthiest 50,000 families in the country are borrowing instead of lending and investing – competing for the same dollars that middle-class Americans normally use to buy homes and start businesses, it’s going to push up interest rates, and affect economic growth.
The Tax Foundation examines the policy challenges of implementing a wealth tax here.
“How will Warren make sure public-college tuition stays at what the federal government is willing to pay?” Asks Megan McArdle writing for the Washington Post. Those colleges are run by the states, and the federal government has no constitutional authority to set tuition at state institutions.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.