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The Problem with Student Loan Forgiveness No Liberal DARES Talk About

by Matt Palumbo
Here’s an angle seldom addressed in the debate over forgiving mounting student debt; that it’s an entitlement for the upper class, not the poor.

Both Elizabeth Warren and Bernie Sanders have released their own plans to cancel all or part of the nation’s collective $1.6 trillion in student loan debt. Sanders’ plan is an across the board cancellation, while Warren’s $640 billion plan would cap student loan forgiveness at $50,000 for those making less than $100,000 annually. Of course, $50,000 is far above the average student loan debt, so her plan is essentially the Sanders plan with safeguards so we aren’t bailing out doctors and lawyers.

Regardless, student loan forgiveness would mostly only subsidize those from families near the top of the income distribution. An analysis of Warren’s plan (which is the more conservative of the two) from the Brooking’s Institute found that: “the top 20 percent of households would receive about 27% of all annual savings, and the top 40% about 66%. The bottom 20% of borrowers by income get only 4% of the savings. Borrowers with advanced degrees [Master’s degree or higher] represent 27% of borrowers, but would claim 37% of the annual benefit.”

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Naturally since the Sanders plan would apply to everyone with debt, it would be even more lopsided in who it benefits. The Warren plan won’t let a doctor earning six figures with a six figure debt load off the hook, but Sanders does.

Bernie proposes paying for this plan with new taxes on Wall Street including a 0.5% tax on stock trades (50 cents per $100 of stock value), a 0.1% fee on bonds, and a 0.005% fee on derivatives. Ironically those on Wall Street would be best equipped to avoid such a tax. Sweden introduced an identical 0.5% tax on stock transactions in 1984, and later implemented smaller taxes on bonds and derivatives (which only garnered 5% of the revenue expected). Trading in futures fell 98%, the options market practically disappeared, and by 1990 half of all stock trading in Sweden had moved offshore to London. The tax was later repealed in 1991.

The Poor Already Have Programs in Place to Make College Cheap

It’s clear that the primary beneficiaries of loan forgiveness would be the upper class, but isn’t that simply because only wealthy families can afford to send their children to school in America? Obviously not for two reasons, the most obvious being that if that were the case we wouldn’t have a student debt crisis in the first place. Second, the Federal government already does have programs in place that make it possible for the poor to graduate with no debt from tuition.

The average Pell Grant a poor American student would be eligible for in 2017-2018 of $4,010 was higher than the average community college tuition that year ($3,347), and the maximum Pell Grant of $5,920 covered two-thirds of the average in-state college tuition that year ($9,970). None of this accounts for any low-income scholarships those students may also be eligible for.

Debt Elimination Wouldn’t Prevent Future Students From Accruing Debt

Debt forgiveness may wipe the slate clean for millions of students – but not for every subsequent student for future generations. Rather than address the root problem leading to student debt (skyrocketing tuition and campus living expenses), the Bernie and Warren plans only put a band aid on those currently injured with debt, but not the millions who will accrue debt after them.

Indeed, even tuition free college wouldn’t solve the student debt crisis, as the puzzling case of tuition-free-college existing alongside massive student debt burdens in Scandinavia proves.

While tuition is free, room and board are not. Paradoxically, offering free tuition seems to have incentivized students to be more likely to rack up debt by moving out early. While it’s becoming more common for American students to save money by living at home and attending a two-year community college, there’s less incentive to do so with “free” tuition.

  • In 2015 Swedes who borrowed to attend college had an average $17,266 in debt.
  • In Norway, the average student graduated with 280,000 NOK in debt in 2016. That amounts to roughly $32,000.
  • For contrast, the average student debt for someone graduating in America’s class of 2015 was approximately $30,100.

Furthermore, making college “free” risks greatly devaluing the worth of a college degree. An American college graduate earns 75% more than an American high school grad – but a Swedish college graduate earns only 9% more than a Swedish high school grad.

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America’s higher education system needs major reforms to bring costs down – and both Sanders and Warren don’t even pretend to do that.

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