Senators Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts are making headlines with their plans to forgive student loan debt and make public colleges tuition-free.
While many agree removing financial responsibility on the part of the student is bad policy, the 45 million Americans holding student loans undoubtedly see debt forgiveness as attractive.
Why should American taxpayers have to pay off loans that students took on voluntarily?
Burdensome student loan debt is indeed problematic. Studies show it has discouraged desirable economic activity such as starting a business or buying a home. But loan forgiveness will cause more problems than it solves.
Both Warren and Sanders propose to pay for their plans by raising taxes. Why should American taxpayers have to pay off loans that students took on voluntarily?
Two-thirds of Americans do not hold bachelor’s degrees. Their choice not to go to college, whatever the reason may be, in many cases may have involved a desire to avoid the high cost of higher education.
These Americans are statistically less likely to earn as much as Americans who do hold bachelor’s degrees. It is regressive, or taking a larger percentage from low-income earners, to ask Americans who purposely avoided the high cost of college to pay for students who chose to take on mountains of debt.
[caption id="attachment_179056" align="aligncenter" width="2400"] The occupation of the clock tower at New York City's historic Cooper Union college to protest the imposition of fees. Students are demanding that the college remain free. Photo by Michael Fleshman, via Flickr.[/caption]
Loan forgiveness rewards Fiscal irresponsibility.
Senator Sanders proposes eliminating all $1.6 trillion in student loan debt, regardless of student need.
Many students decided to take a frugal path through higher education, which should be encouraged. Perhaps they decided to go to a less expensive school and took on a part time job. If loan forgiveness becomes universal, students who made those smart financial decisions, ensuring they make their loan payments on time, will be given the same benefit as students who went to the most expensive university and have defaulted on their loan payments every month. Why would any student going forward decide to go the responsible route? And why work, knowing taxpayers will pick up the tab?
Why work, knowing taxpayers will pick up the tab?
Not to mention the millions of members of our military who receive tuition-free college as a benefit earned for serving our country. This benefit would be rendered useless if it is granted to everyone.
Loan forgiveness programs already exist, and even these limited programs are extremely problematic.
For example, there’s the Public Service Loan Forgiveness (PSLF) program, which discharges the loans of public sector employees after just 10 years of government employment. The Congressional Budget Office projects this program alone will cost $24 billion over the next 10 years.
The generous terms of PSLF yielded many unintended consequences—one of them being many more students enrolled in the program than originally anticipated and took on far more debt.
As AEI’s Jason Delisle has written:
"60,000 new borrowers enroll in PSLF every quarter. Other Department statistics show that most participants borrowed well in excess of $50,000 in federal loans and one-third borrowed more than $100,000. Such high debt levels indicate that the program is mostly benefiting borrowers with graduate degrees."
Importantly, borrowers with graduate degrees earn more on average than those with fewer years of education. It seems troublesome that those best equipped to pay off their loans will benefit the most from a student loan bailout.
[caption id="attachment_179054" align="aligncenter" width="4288"] Personal finance budgeting should play an important part in your long-term plans to gain financial stability and into having a clear idea of what you want in future. Part of ensuring your financial stability is ensuring you look into your credit report at least once a year. Credit reports are important pieces of information about you and can affect everything from getting a loan to getting a house or even renting an apartment. (U.S. Air Force photo by Staff Sgt. Steven R. Doty, 47th Flying Training Wing.)[/caption]
PSLF should serve as a cautionary tale.
Loan forgiveness will undoubtedly cost more than projected and more students will enroll in college who may have otherwise been gainfully employed in the workforce.
To pay for this the Sanders's plan calls for a tax on Wall Street trading.
Heritage’s Adam Michel argues that, historically, such taxes increase market volatility and do not generate nearly as much revenue as expected. Inevitably, the middle class ends up stuck with the tab, either through tax increases or damage to the economy.
Loan forgiveness doubles down on the failed federal policies that led to the $1.6 trillion student loan crisis.
While loan forgiveness sounds attractive, we should focus instead on how we got here.
Federal student loans offer colleges and universities excessive funds that enable them to raise their tuition without fear of losing customers. Instead, Americans should be holding colleges and universities accountable by tightening the purse strings coming from Washington.
Eliminating federal student loans will encourage colleges to step up their game, lower their prices, and maybe even begin teaching marketable skills. Loan forgiveness doubles down on the failed federal policies that led to the $1.6 trillion student loan crisis.
Mary Clare Amselem is a policy analyst in the Center for Education Policy at The Heritage Foundation