Many progressives are cheering Senator Elizabeth Warren’s new proposal that promises to eliminate all student loan debt for three quarters of the 45 million Americans who owe college loans. They are also applauding the 2020 Democratic presidential candidate’s call for college to be universal, with free tuition at every public two- and four-year college. And she proposes a huge expansion of federal grants to make non-tuition expenses more affordable, allowing students to graduate debt free.
The cost? $1.25 trillion over 10 years.
This proposal is ridiculous.
It is ridiculous in a way that should be salient to progressives: People who go to college typically earn higher incomes than those who don’t. So debt forgiveness takes tax revenue — which comes from taxpayers, not from the money tree — and redistributes it to those who are relatively well-off.
The U.S. government would forgive up to $50,000 in student loan debt for people in households earning less than $100,000 per year, with smaller debt forgiveness for annual incomes up to $250,000. A household with $160,000 of income gets $30,000 of debt forgiven, for example.
Aside from all the ways such a plan would provide incentives to enterprising people to game the system and to colleges to inflate costs even more than they already do, there’s a larger principle here: The U.S. needs to spend less public money on households earning comfortable incomes, not more.
Warren estimates that debt forgiveness would cost $640 billion. To put that in perspective, it would cost about $6 billion per year to double the earned-income tax credit — a federal program that subsidizes wages for low-income households — for childless workers. I’d rather spend the marginal taxpayer dollar expanding economic opportunity for the working poor than giving a subsidy to relatively well-off households.
Moreover, what matters here is lifetime income. A household with, say, two 27-year-old college graduates earning $85,000 today should expect to earn considerably more over the next four decades. Their salaries will grow as they gain experience in the labor market.
Forgiving their loans today, then, shouldn’t be thought of as a transfer to a couple with a five-figure income. Instead, it is a transfer to a couple who will earn several million dollars over their working lives.
Those with student debt borrowed money from the taxpayer to finance college. This is typically a great deal for those who graduate from college. Both graduates and dropouts presumably understood the deal at the outset. But particularly for those who graduated, it is unfair to the taxpayer — in this case, the lender — to forgive the debt.