A central plank of presidential candidate Bernie Sanders's campaign is to forgive the entire $1.6 trillion in outstanding student debt. His rival, Elizabeth Warren, wouldn't go quite that far, limiting loan forgiveness to a several hundred billion dollars. But Warren has introduced a twist: she claims that a president who wants to forgive student debt can bypass Congress and use his or her executive authority to bail out student borrowers.
Legal experts differ over whether such a move is within the president's power, but constitutional issues aside, neither plan is sound policy. Student loan forgiveness amounts to a cash transfer, often a very large one, to some of the most well-off individuals in our society. Recall that two-thirds of our workforce is working and living without the benefit of a bachelor’s degree and the additional earnings that come with it. While many graduates have large student loan balances, they’re also likely to see high payoffs from their investments in postsecondary education.
According to an analysis by Adam Looney of the Brookings Institution, student borrowers in the highest earnings quintile (those earning more than $111,000 per year) would receive 27 percent of the financial benefits that would accrue under Warren’s plan. Another 38 percent would flow to borrowers in the second-highest earnings quintile, while borrowers in the bottom quintile would pick up just four percent.
To her credit, Warren has tried to make her proposal less regressive by curtailing loan forgiveness for the highest earners. Under her proposal, eligibility for forgiveness declines once household income passes $100,000 and is eliminated entirely once household income exceeds $250,000. But her plan still ends up mostly benefiting better-off people, among whom student loan debt is concentrated. According to a recent analysis published by at the Urban Institute, the richest households—the top quarter of the income distribution—held more than one-third of all outstanding student debt. As Looney argues: “The reality is that it’s hard to design a progressive and coherent loan relief policy that is better than the policies we have in place today.”
There are certainly people who are struggling with student loan debt, especially those borrowers who dropped out of college before finishing a degree. Even though these people have lower debt balances than their peers who spent more time in school, they aren’t able to realize the labor-market benefits of a degree and are therefore disproportionately likely to fall behind on their loan payments.
You might be surprised to learn that we already have a robust safety net in place to support people with student loan payments that are truly unaffordable. The existing income-based repayment programs allow borrowers to reduce their monthly payments to a fixed share of their discretionary income, keeping them affordable. If a borrower on income-based repayment has not paid off her loans after 20 years (or 10 years if she works in public service), her remaining balance is forgiven.
Many people do not know that this policy already exists: only 43 percent of undergraduate borrowers were aware of income-based repayment in 2016, and many candidates in the Democratic primary have done little to publicize these programs. This is misguided—ensuring that struggling student borrowers are aware of the programs designed specifically to help them is a far more cost-effective way to address student loan problems than simply canceling debt en masse. This can be seen in a recent study we published by the University of Chicago economists Katerina Nikalexi and Constantine Yannelis, which demonstrated that a mere change in the enrollment procedure for these programs could significantly reduce borrower hardship.
Though well-intentioned, Senator Warren and Sanders's plan to forgive most student debt is poorly targeted and is much more expensive than is necessary to address the problem. Rather than using her executive authority to cancel hundreds of billions of dollars in debt, a President Warren or Sanders should work with her Department of Education to ensure that existing programs to help struggling borrowers are working properly. It’s possible to channel aid to borrowers who need it without forcing taxpayers—many of whom never went to college—to pay for a massive cancellation of the debt of people who did.
Preston Cooper is a higher education analyst and a PhD student at George Mason University. Follow him on Twitter here.
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Photo: Sen. Bernie Sanders (I-VT) and Sen. Elizabeth Warren on July 30, 2019 in Detroit, Michigan (Photo by Justin Sullivan/Getty Images)