Warren's Student Debt Forgiveness and Free College Tuition Plan Would Worsen Higher Education

Senator Elizabeth Warren (D-MA) is getting ready for the 2020 presidential election and positioning herself as a populist who is out there to help hard-working Americans. This was made clear when she proposed the wealth tax earlier this year. Now, Warren is building on the tax plan with the college plan she announced last week. Her plan can be divided into two main sections: student debt forgiveness and free college tuition. We will scrutinize the two sections separately.

Student Debt Forgiveness

Part one of Warren's plan is to cancel up to $50,000 in student debt for the 42 million Americans with student debt. The plan starts to phase out if a household makes over $100,000, and offers no debt cancellation for those making above $250,000. Warren's argument is that because student debt delays certain life events (e.g., starting a business, buying a home), the government should step in to forgive the debt. Essentially, Warren wants to remove a major financial burden so people can better live the American Dream. I like the fact that Warren puts a cap on the forgiveness, and I like the fact that she has come up with a detailed plan instead of some pie-in-the-sky thinking like certain peers of hers.

That being said, Warren's plan runs into problems (please read my analysis on student debt forgiveness from seven years ago). College graduates on average make an average of $1 million more than those with high school degrees (Georgetown University). As of 2018, 32.5 percent of Americans have a Bachelor's degree or higher (Census). As the libertarian Reason Magazine and the conservative American Enterprise Institute argue, Warren's plan would be a subsidy to those who are better off that is paid by those without a college education. 

[Other factors I considered seven years ago were the fairness to those who managed to pay their student loans (myself included), the fact that those indebted were forced to take out the loans, why student loans should get preference over other loans, or how it would affect lending to future students.]

But I want to consider something else here today: the dropout rate. Why does this come into play? Because only about 49.1 percent of full-time, first-time college students graduate from a four-year institution within six years. That figure is a lower 39.8 percent for two-year institutions. This is significant for two reasons. One is that college completion is a major determinant in whether going to college ends up being a good investment. The first reason leads into the second reason, which is that there are many people who drop out of college with nothing to show for it except debt and foregone time that could have been used developing workforce experience. 

The reality about dropouts is further illustrated by student loan demographics. According to the Federal Reserve, the average debt is $32,000, whereas the median is $17,000. In layman's terms, this means that half of those in debt have $17,000 or less. This statistical distribution means that those owing a ton of money is less common than perceived (see below). There are those who have a large amount of debt, but those large amounts tend to be caused by graduate school loans. The issue I take with Warren's plan is that it does nothing to address the dropout rate, a phenomenon that makes it more difficult for people to pay back many of the smaller loan balances. 

Free College Tuition

The second component of Warren's plan is to eliminate the cost of tuition and fees at every two-year and four-year public institution. Free college tuition is in part to make sure that indebtedness is never a problem again, and in part to provide the American people with what she perceives as a public good and a right. There are multiple problems of trying to provide "free" college tuition, a topic that I covered in 2015. 

One of my bigger gripes about free tuition being presented as a solution is that it drives up the cost of college. In addition to my 2013 analysis about artificially low interest rates for student loans, there is a Federal Reserve Bank of New York research paper (Lucca et al., 2015) and a National Bureau of Economic Research paper (Gordon and Heldund, 2016) amply illustrating how federal subsidies are the primary culprit in the skyrocketing college tuition costs since the 1980s (also see Warshawsky and Marchand, 2017). And for added measure, here is another National Bureau of Economic Research paper (Murphy et al., 2018) showing how ending free college in the United Kingdom actually allowed for more students to attend college. My questions to Senator Warren are the following: "How is doing more of the same going to make college cheaper?" "How does subsidizing incentivize students to make smarter choices about what to study in college or even if they should go to college?" "How do these subsidies create better schooling, especially considering so many are dropping out already?"

Conclusion

None of this gets into the effects of a wealth tax (see my January 2019 analysis here), how this would not be a one-time occurrence, or how public schooling would cost the taxpayer more than what her wealth tax would earn in revenue. What I will end with is this: I will give Warren the benefit of the doubt by saying that she is not proposing this plan as political pandering, but rather because she legitimately wants to fix higher education. Even so, Warren's plan is not about fixing the system so much as it is about expanding federal government control in higher education. Her plan does not address the moral hazard of forgiving student debt, nor does it make the case of how higher education is going to improve as a result of throwing more money at the problem. Yes, there are problems with higher education affordability, but Warren's plan does not do any favors for tertiary educational attainment.


4-24-2019 Update: Centrist think-tank Brookings Institution shows just how regressive the loan forgiveness proposal is.

4-26-2019 Update: The American Enterprise Institute points out how the U.S. already has a loan forgiveness program, one that is arguably more generous than Warren's proposal.

4-30-2019 Update: The libertarian Cato Institute lays out five reasons why Warren's plan is problematic. 1) It's unfair. 2) There is no student loan crisis. 3) Misdiagnosis of the problem. 4) We don't need that many people with a college degree. 5) There is no indication that student debtors would use their economically more productive.