Plans to mitigate—and even solve—the student debt crisis have been on center stage in Democratic Party politics for some time. In late June, Senator Bernie Sanders proposed a plan that would result in all the approximately $1.6 trillion in student loans being forgiven. This is an even more ambitious plan than that of rival Sen. Elizabeth Warren’s proposal, which would involve forgiving student loans for around three-quarters of borrowers by allowing people who earn less than $100,000 per annum to request up to $50,000 in forgiveness.
Despite the promises made by these proposals, they are not a “solution” to the student debt crisis. While these proposals offer a promising way to reduce the debt burden in the short-term—which has various impacts on the economy, such as reduced rates of homeownership and entrepreneurship among borrowers—over the long-term, these plans do not align.
Student debt is a massive issue in the United States. Over 44 million people currently owe money through student debt, and it is estimated that 26 percent of federal undergraduate loans issued in 2018 will enter into default at some point. It is expected that within five years of entering repayment, almost half of student borrowers will have negatively amortized, which means their loan balance has increased since they started paying back their loans. Student debt is an important issue for Democrats, and while other Democrats have proposed plans to mitigate the student debt crisis, Senators Sanders and Warren’s plans are the most ambitious.
In both proposals, all undergraduate programs at public colleges would be free for all students. This would mean students would no longer have to take out a loan to finance their education at those institutions. But this proposal does not eliminate student debt and does not address many of the other institutions where people go to college and have to borrow money—namely, private and for-profit colleges.
Coverage on Forgiveness Plans Is Limited
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According to the Department of Education’s report on the student loan portfolio by school type, 40 percent of loans are taken out to attend professional or graduate school, such as Ph.D. programs, law school, medical school, and others. Graduate school is more expensive than public school due to its specialized offerings, and there is also no limit on how much money students can borrow from the federal government for these programs, a result of a law passed in 2005. This is important to note because the average debt for graduate and professional school graduates can sometimes be upwards of $100,000. The Department of Education recently reported that there were 1,126 graduate programs which cost upwards of that amount. Because student debt is so high among graduate school students, the impact of Sen. Warren’s plan would be further limited because it does not address this section of students.
Further, the Education Department also states that only 24.9 million borrowers attend public school, which represents $619.6 billion of the total $1.6 trillion of outstanding student loans. This means, even if the plan was to pass, there would still be many students who would realize no benefit. If people favor private schools more than public schools, then “hitting the reset button” on student loan debt, as Sen. Sanders claims the plan would do, will have a lesser impact than expected. Students will continue to incurred debt, and only those who decide to attend a public school will benefit from the program.
Loan Forgiveness Ignores Most Students
The problem lies not just in coverage, though. What happens when student loans are forgiven? More specifically, will the people who take out loans in the future also have their debt forgiven? Neither the Warren nor Sanders plan accounts for how much their programs would cost if they were to forgive future debts. Further, those who have already paid back money on their loans would also get nothing in return. If the average student in the Class of 2016 graduated from a four-year college with $29,650 in debt, how would those people—and students in previous cohorts—feel if they had paid back most or all of their loans just to have most or all student debt forgiven? Yet, the people who had debt on the day the plan was passed would benefit. Overall, this sets a bad precedent for how we should treat loans. If the prospects for these plans become more promising in the future—and if Warren or Sanders is elected and can overcome the many issues in partisan politics—should students then take out more debt than they need to just because it will be forgiven?
There is another problem with student loan cancelation: it would increase government intervention in education where it perhaps is not needed. Public undergraduate education will be debt-free for students, and so the federal government would be more involved in the further education system. States would also have to get more involved, and the price of higher education—and how much money colleges will get—will become dependent on how much states and the federal government are willing to delegate.
States often have trouble finding the money they need to adequately fund education, so perhaps the Warren and Sanders plans will increase pressure on states to raise sales and corporate taxes so they can finance public undergraduate higher education and comply with the policies. It is also worth noting that the federal government has a terrible track record when it comes to administering student loans, and perhaps more intervention in the education market will only cause more problems. A recent report by the Office of the Inspector General in the Department of Education found the department had failed to do enough to hold loan servicers to account and monitor their behavior.
Further, the proposals by Sens. Sanders and Warren do nothing to give schools more skin in the game, which would incentivize them to increase outcomes and work harder toward reducing the cost of tuition. Student loan forgiveness would send a signal to schools that they are not strictly accountable for the debts of their students, and they would have very little incentive to change their ways and work to reduce tuition costs—one of the main causes of the rising student debt crisis.
What Other Ways Are There to Mitigate the Student Debt Crisis?
There are more reasonable ways we can reduce dependence on student loans and increase access to college for more borrowers. Recently, colleges and coding bootcamps around the United States have started to adopt Income Share Agreements, or ISAs. ISAs allow students to raise the money they need for their education in exchange for a percentage of their future income, but only if they get a well-paying job after graduation. If a student succeeds, they will pay back more money; if they don’t succeed, they will pay back less. Students who earn under a certain amount each year will not be required to make payments until they earn over that amount, or their ISA expires. The agreements also cap payments at a multiple of the initial amount borrowed to protect students who are very successful after graduation.
Income share agreements can increase access to education for millions of people because they are not debt. Students only need to repay their ISAs if they succeed, which means schools have additional pressure to provide a high-quality education and offer career advice to help graduates succeed and find a well-paying job. Therefore, those who are uncomfortable taking out a student loan—or who are unable to do so—can turn to an ISA to finance their education on flexible terms. A recent paper by the Manhattan Institute outlined an idea for a federal income share agreement program which would replace all current student debt programs and allow students to finance their education on flexible terms, rather than taking out debt, which imposes various financial and emotional burdens on students.
These agreements have recently faced criticism, especially by Senator Warren, who, in a recent letter to the Secretary of Education, stated that ISAs were “simply a debt that must be repaid” , and include “exploitative terms” and may promote discrimination. Recent legislation proposed by a bipartisan group of Senators—the ISA Student Protection Act—aims to mitigate these concerns, although market players are already complying with best practices set forth in proposed legislation.
The federal government should also spend more time revisiting programs such as the Public Service Loan Forgiveness program, which was signed into law by President George W. Bush in 2007. This program allows borrowers to request forgiveness on the remaining balance of their loans after they have made 120 qualifying monthly payments under a qualified repayment plan while working full-time in a public service position—in a government agency, for example. This program has been dubbed a “spectacular failure” and has had a rejection rate of 99.3 percent. Despite this, the program offers a path for some public service employees to request forgiveness. The failure of this program also begs the question: how can we be sure a national plan would turn out well, especially if it would have to go through a long political debate in the public before being enacted, if it ever is enacted?
What Can We Expect?
Sen. Warren’s plan—estimated to cost $1.25 trillion over ten years—would be funded by a two percent wealth tax imposed on people with a net worth of over $50 million. According to Sen. Warren, this would raise enough money to finance the student debt forgiveness proposal and provide additional capital to invest in improving the education system further. Sen. Warren’s plan would limit past loan forgiveness to $50,000, and only for families who earn less than $100,000 per annum. There would also be a partial forgiveness program for families who earn up to $250,000.
While Sen. Warren’s plan would help reduce the debt load for millions of borrowers around the country and in some cases give people total forgiveness, it is not a long-term solution. The same goes with the Sanders plan, although it would perhaps help more people because it includes no means testing or income requirements to benefit from loan forgiveness.
Both plans would indeed help reduce the amount of outstanding student debt, but there are still major flaws in the programs. Senators Warren and Sanders’s plans do not address the problem of long-term forgiveness, which means that in a few years, if the plans were to pass, we could be back to where we were with the same amount of student debt and another debate around forgiveness. The plans also do nothing to give schools skin in the game to increase the pressure on schools to reduce tuition.
The $1.6 trillion of outstanding student loans is difficult to comprehend and represents loans of a variety of different types offered to students enrolled in many different programs. While the plans from Sens. Sanders and Warren may have an impact, there are more reasonable options out there, like Income Share Agreements. These agreements would give schools skin in the game, reduce the amount of outstanding debt, and provide a viable long-term path toward addressing the debt crisis. Sens. Sanders and Warren’s plans have a long way to go before being passed, but it looks like there are better ways to address the student loan crisis.
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