Senator Bernie Sanders’ Student Loan Plan
Senator Bernie Sanders (I-Vermont) has rolled out his plan to address student loan debt, and it’s a doozy.
First, Sanders proposes we cancel all $1.6 trillion of outstanding student loan debt outright – including both federal and private loans. This would directly affect about 45 million Americans. The direct savings for the average student loan borrower would translate to about $3,000 per year.
Sen. Sanders addressing a town hall meeting at Vermont College. Photo credit: Sanders.senate.gov.
The College for All Act
Sanders also champions passing the College For All Act. This bill would provide $48 billion per year or more to make four year public colleges and universities and community colleges tuition free. The bill would also apply to tribal colleges, community colleges, trade schools and apprenticeship programs.
The Sanders plan is far more expansive than Senator Warren’s plan. Her plan caps loan forgiveness at $50,000 per person, and does not benefit anyone with an income greater than $250,000. Sanders’ plan would forgive the entire balance, regardless of the amount, and regardless of income.
Sanders introduced hist proposed legislation last week. Co-sponsors include fellow progressives Rep. Ilhan Omar (D-Minn.) and Rep. Pramila Jayapal, (D-Wash.), the co-chairwomen of the Congressional Progressive Caucus.
Photo credit: David Mark, courtesy of Pixabay.com.
No caps or eligibility criteria
Unlike the Warren plan, which would not benefit high-income families, the Sanders plan has no income eligibility criteria – or any other eligibility criteria, for that matter. Anyone, regardless of income or citizenship, could receive debt elimination and go to college tuition-free under the Sanders plan.
Sanders is an independent Senator from Vermont, though he filed with the Federal Election Commission as a Democrat to run for president in the 2016 and 2020 elections.
Other elements of Senator Sanders’ plan include:
Lowering interest on student loans to the federal rate, so the federal government “does not make a profit on student loans.”
- Expansion of refinancing options so borrowers can refinance existing loans at a lower interest rate.
- Four-year public colleges and community colleges should be free – including tuition and fees – for everyone.
lower student loan interest rates by restoring the formula which was in effect until 2006. Student loan interest rates would be cut almost in half for undergraduate students, dropping from 4.32% to 2.32%. In addition, the legislation would ensure rates never rise above 8.25%.
- Student loan refinancing should be revamped to help save money for more borrowers.
Create a pilot program to eliminate the requirement that students re-apply for financial aid each year. The plan would simplify the application process and removing significant barriers faced by low-income students.
- Provide $1.3 billion to private, non-profit historically-black colleges and universities (HBCUs) and minority-serving institutions (MSIs) every year to eliminate or significantly reduce tuition and fees for low-income students.
- Double-funding for the Department of Education’s TRIO programs, such as Upward Bound and Veterans Upward Bound.
- Increasing funding for the GEAR UP program to benefit lower-income and handicapped students as well as first-generation college students.
Sanders and the College For All Backers believe that the bill’s benefits would reach 1.5 million more students under the TRIO programs and 100,000 more under GEAR UP than these programs reach today.
The price tag
Sanders has been slipping behind Sen. Elizabeth Warren in the polls in recent weeks, and needed to make a splash to stay viable in the presidential race. His plan is far more ambitious – and pricey! -than Warren’s plan.
“We can guarantee higher education as a right for all and cancel all student debt for an estimated $2.2 trillion.” In contrast, Warren’s plan would run up about half the cost of Sanders’ plan over the next ten years.
Sanders has been slipping behind Sen. Elizabeth Warren in the polls in recent weeks, and needed to make a splash to stay viable in the presidential race. His plan is far more ambitious – and pricey! -than Sanders’s plan.
Paying for it
Unlike Warren, who wants to impose a wealth tax on wealthy Americans to raise the money for her plan, Sanders proposes a new tax on financial transactions:
- 0.5% tax on all stock trades;
- 0.1% tax on all bond trades;
- 0.005% tax on all derivatives trades.
The tax plan will include a 0.5% fee on all stock trades, a 0.1% fee on all bond trades and a 0.005% fee on all derivatives trades.
Sanders claims this tax will raise $2.4 trillion over the next ten years.
This Wall Street speculation tax will raise $2.4 trillion over the next ten years. It works by placing a 0.5 percent tax on stock trades – 50 cents on every $100 of stock – a 0.1 percent fee on bond trades, and a 0.005 percent fee on derivative trades.
There are a number of criticisms of Sanders’ plan, both from conservatives and even from some liberal thinkers, as well.
Criticism from the right
On the right, conservatives have argued that Sanders’ student loan plan is unfair to to many Americans. These include those who have paid off their own student loans, worked hard so their children did not graduate with student loans, went to inexpensive colleges, worked through college, or who skipped college altogether. They argue that it is unfair to require these people who have already sacrificed to subsidize wealthy people for their own choices.
Wall Street advocates and some economists also argue that Sanders’ plan to tax financial transactions would be passed on to consumers via their pension plans and 401(k)s. The cost would still be primarily borne by middle-class people through their IRAs, 401(k)s, 403(b)s and pension funds. Investment companies would increase fees and spreads to cover the tax. Future returns on stocks, bonds and derivatives trades would be reduced by the amount of the tax.
They also argue that traders would change their behavior to account for the tax. This means that capital income decisions would become less efficient, which has a severe hidden cost. Trading could be moved offshore. Additionally, taxes on financial transactions tend not to raise anywhere near the amounts projected.
“There’s no way a transaction tax would pay for this,” wrote the editorial board of the Wall Street Journal. “It could make America’s capital markets less liquid or push traders overseas. By lowering asset values, it would dent every 401(k) and public pension, while raising costs for institutional investors. Mr. Sanders says it would raise $2.4 trillion over a decade, but France’s version failed to meet revenue targets.
“A Dangerous Scam.”
“A dangerous scam,” writes David Baranyi, writing for the libertarian-leaning Reason.com:
None of this is even accounting for the moral hazard caused by “free college”—or “free” anything, for that matter. We’ve seen some of this in play since the Obama administration took over responsibility for college loans. Progressives want to create a system without risk, where students aren’t responsible for their debt and schools aren’t responsible for their costs. Once colleges know that prospective students can get any loan for any major they desire, incurring no risk whatsoever, what motivation do these institutions have to offer degrees of value?”
And, in the end, forgiveness does nothing to lower costs. Then again, when the state takes control of private institutions, it inevitably turns to price controls and all the usual tools that destroy industries.
“Debt forgiveness punishes those who did the right thing, made sacrifices, and acted wisely and frugally, as well as those who simply didn’t have the opportunity to go to college. Isn’t this the sort of private gain at public expense that people on the left claim to abhor?,” Writes Michael Solon, a former aid to Republican Senator Mitch McConnell in the Wall Street Journal (subscription required).
He continues with a moral hazard argument:
“Such forgiveness would also eliminate a quality-control device that drives students to ensure their investment can be monetized to cover their costs. A student who borrows must make sure his future earnings will be enough to pay off the loans. If that incentive disappears, with free debt or free college, the graduate and the nation would suffer economically.”
Criticism from the left.
On the left, liberals have argued that student loan forgiveness primarily benefits the wealthy and affluent. The bulk of the student loan forgiveness benefit would benefit wealthier, higher-income professionals, who borrow a disproportionate share of student loan debt. Relatively little would benefit those in the lower income quintiles.
Adam Looney, writing for the Brookings Institution, estimates that even under the Warren plan, which caps the benefit at $50,000 and reserves it for those with incomes of $250,000 or less:
- The top 20 percent of households receive about 27 percent of all annual savings
- The top 40 percent will receive about 66 percent.
- The bottom 20 percent of borrowers by income will get only 4 percent of the savings.
Under the Sanders student loan plan, which has no income caps on eligibility and no limit to the amount of debt that can be forgiven, an even greater share of the benefit will accrue to the top 20 percent of borrowers by income.
The Urban Institute also points out the regressiveness of student loan forgiveness here. According to their analysis, a plan that forgives all student loan balances with no caps or income eligibility criteria, as is the case with Sanders’ student loan plan, awards more than half of all forgiven dollars to those in the top two income quintiles. Only about 12 percent of the benefits would go to the bottom 20 percent of earners.
Moreover, any such mass student loan forgiveness plan will exclude everyone who didn’t go to college at all. They will be on the hook to pay off student loans for others, who entered very lucrative careers like medicine and law. That doesn’t sit right with Colleen Campbell, a director at the liberal Center for American Progress. “We have to take into account: They’re not truly universal because not everyone enrolls in college,” Campbell said.
Sanders has been struggling in the polls lately. He’s been losing ground to both Senators Warren and Harris. He timed his announcement just before the first round of Democratic candidates’ debates to gain some traction. Sanders has also pushed a “Medicare For All” universal health care system that would also come with a hefty price tag. It would be difficult for any President to push both bills through Congress and include anything like an adequate funding mechanism. A complete forgiveness of all student loans with no dollar or income caps, nor eligibility criteria, is probably a political non-starter in the Senate.
“I don’t think there’s a chance of any major loan forgiveness like what Senator Warren and Senator Bernie Sanders are proposing unless Republicans lose the Senate,” wrote Travis Hornsby, CEO of StudentLoanPlanner.com, in an email to subscribers.
Nevertheless, a massive-scale student loan forgiveness plan will likely prove popular to be popular among Democratic primary voters, and that is who the candidates need to reach for now. It may also help drive Millennial turnout – a key component in the Democratic Party’s electoral strategy for 2020.
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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.