Unfairness: Three Huge Problems With Elizabeth Warren's Student Loan Debt Bailout Scheme

Posted: Apr 24, 2019 1:45 PM
Unfairness: Three Huge Problems With Elizabeth Warren's Student Loan Debt Bailout Scheme

The latest proposal to slide down Elizabeth Warren's left-wing conveyor belt is a far-reaching student debt forgiveness scheme, financed by -- surprise -- the very rich.  For the basics on her plan, click through and read the first few bullet points.  There's no doubt that to the millions of Americans who are saddled with significant student loan debt, the notion of someone else relieving them of those obligations is understandably appealing.  But Warren's policy prescription is unworkable, unfair, and fails to address the fundamental underlying problem of ever-increasing college costs.  Let's take each issue, one by one:

(1) Root causes.  The price tag of higher education in America keeps sailing higher, with the expensive trend only worsening since the federal government's last major intervention (in which the Obama administration federalized the student loans process, leading to large "unexpected" costs to taxpayers).  While Warren seeks to erase huge amounts of this debt from the books, her bailout wouldn't help correct the factors that have driven these costs so high in the first place.  Indeed, when the government subsidizes and guarantees things, they often get more expensive.  Here's Charles Fain Lehman writing at the Free Beacon:

Although Warren mostly avoids acknowledging this in her Medium post, such mass loan forgiveness is possible because the federal government holds the overwhelming majority of all outstanding student debt—about 78 percent as of the end of 2018. This is thanks in large part to Obama-era changes that moved the federal government from guarantor to issuer of loans. (Warren does note that private student loan debt would also be eligible for cancellation, although she does not specify how.)...Student-loan debtors are an odd group to target for government largesse. Because a college degree commands a substantial wage premium, the cost of a student loan is usually worth the investment over a person's life time (assuming they graduate, which many do not)...College grads would win; so too might universities. Dr. Lindsey Burke, who directs the Center for Education Policy at the Heritage Foundation, pointed out that if Warren's debt jubilee happens...it will become a major hand-out to universities, who can jack up their tuitions proportionally. "There is one big clear winner, and that's the universities," Burke [said]...Her proposal would transfer billions to those already at the top of society, while likely doing nothing to address the underlying dynamics that plunged 45 million Americans into debt.

(2) Unfairness.  Warren's 'wealth tax' that would allegedly pay for this bailout (more on that below) would simply confiscate money that has already been taxed -- and that will be taxed again under the death tax -- in order to eliminate debts willfully taken on by people with eyes wide open.  Her entire premise is that society is entitled to take even more bites out of privately-held wealth.  This is not fair or just.  The other fairness problem inherent in this plan applies to the countless millions of Americans who've made difficult, responsible choices in taking on student loan debt over the years, and who made sacrifices to pay off the obligations they accrued.  Warren's plan would punish those who acted responsibly, and reward others.  The incentives are terrible.  A friend of mine who decided to forgo more "prestigious" universities in order to spare herself and her family a years-long slog of paying off debt (opting instead for a state institution where she got a scholarship) told me this idea feels like a slap in the face.  Not only that, this scheme would actually help many people who don't need nearly as much assistance than the truly indigent:

On the surface, Warren's idea might sound like another expensive federal benefit for struggling families. But the nature of college attendance and student loans means that Warren's loan forgiveness plan is a massive giveaway to relatively well-off people. In the U.S., only about a third of people over 25 have a college degree, making them a comparatively elite group whose elite status is reinforced by, among other things, the connections they make while at college. On average, college graduates earn about $1 million more during their lifetimes than non-college graduates, according to a Georgetown University study. A separate study from Pew found that college graduates typically earn about $17,500 more annually than people who only had high school degrees.

Taking other people's money to pay off loans (rationally) incurred by a wealthier population seems like a bad idea, especially considering the perverse incentives this latest federal intervention would erect.  Via a policy expert at the left-leaning Tax Policy Center:

Imagine upper-middle-class twenty-somethings deliberately choosing not to work, for the purpose of gaming the system, in order to have the loans they are capable of paying back over time basically canceled by the government.  This is bad public policy.

(3) The funding mechanism won't work.  Philip Klein notes that Warren wants to apply her (quite possibly unconstitutional) wealth tax to all sorts of other programs, too -- and there's not even close to enough money generated by this cash grab to cover everything she's proposing.  She's off by tens of trillions of dollars.  And that's just looking at the revenues expected on paper.  In reality, there's a reason why most European nations that experimented with these sorts of taxes ended up abandoning them:

Democrats are busy finding new ways to tax the rich. The most straightforward way to do that — an annual tax on household wealth — is an idea with deep roots in Europe that several 2020 hopefuls are hoping to import to the U.S. Yet of the 15 European countries that tried a wealth tax in recent years, only four still employ it. Most of those governments ultimately were underwhelmed by the amount of revenue raised and overwhelmed by the difficulty in collecting an accurate tax...Germany, Sweden, the Netherlands and Austria have all abandoned the policy, citing the high cost of implementation and the small revenue it generated. In France, the most recent country to back away from the idea, the wealth tax was estimated to bring in about 3.6 billion euros annually and cost the country about 7 billion euros annually from fraud as well as an eroded tax base caused by taxpayers leaving the country, according to research by Eric Pichet, a professor at the Kedge business school in France. In the first 10 years the tax was in effect, Pichet estimates that about 200 billion euros of capital left France or was never invested because entrepreneurs opted to put their money in lower-tax jurisdictions.

How...predictable.  It's unquestionably true that significant student loan debt is a problem felt acutely by many young Americans.  Warren's "solution" does nothing to solve the underlying problem, and is rife with major flaws, not the least of which is turning upside down a functional approach to rewards and risks.  I'll leave you with my segment on Fox, during which I made a number of these points: