People with college degrees in the United States tend to be the most well-off members of our society. But many on the left are insistent on the notion that this group needs a bailout. The latest example of this trend, Sen. Elizabeth Warren’s newly announced higher education proposal, offers sweeping forgiveness of outstanding student debt and vows to make public colleges and universities free for undergraduate degrees.
The plan has some glitches, like an incentive for high earners to divorce in order to increase their loan forgiveness eligibility. But overall, it aims to avoid the common trap of unintentionally designing a hugely regressive spending program by phasing out the benefit of loan forgiveness as you move up the income distribution.
Warren argues that her proposal is in response to “a huge student loan debt burden that’s crushing millions of families and acting as an anchor on our economy.” It’s this initial assertion that causes this proposal to go awry.
Some student borrowers are struggling — especially those who drop out before they complete their degrees. But many borrowers are thriving, with earnings afforded to them by their degree that far exceed the cost of paying for their education. Researchers have repeatedly found that the individual reward of going to college, which comes in the form of more consistent employment and higher earnings, far exceeds the cost of college. The estimated rate of return on associates and bachelors degrees is approximately 15%; that’s about double the return you’d expect in the stock market.
And borrowers with large balances aren’t who you’d expect. Those who amass the large balances we often read about in the media tend to have graduate or professional degrees. The typical undergraduate tends to finish with only about $30,000 in debt. And not all who borrow do so just to make ends meet. My research shows that students who borrow large sums for their undergraduate education often come from the most well-off families because they attend the highest-cost institutions. These are the people who will benefit from Warren’s proposed loan forgiveness scheme.
But what about those who are truly struggling? They certainly exist. We’re seeing about one million borrowers default on their federal student loans each year, a sign that many borrowers aren’t able to make ends meet. What they and many observers of higher education don’t realize is that we already have in place a robust safety net that relieves borrowers of their obligation to repay when it is truly unaffordable.
Income-based repayment ties a borrower’s monthly payment to their ability to repay (based on their income and family composition) and forgives balances for borrowers who maintain an inability to repay for an extended period of time (10 or 20 years based on employment sector). Warren fails to mention this part of our current lending system in her Medium post announcing the platform, which is not surprising since its existence undermines her argument that student debt is “crushing” borrowers.
The real student debt problem likely isn’t the one you thought it was — and certainly isn’t the one that Warren is describing. So we have to ask: Is this really the “problem” we want to spend tax dollars solving?
Only about one third of workers in the U.S. economy benefit from the earnings boost afforded by a four-year degree. How do we tell the other two-thirds that their problems will have to wait so that the already privileged don’t have to suffer the indignity of delaying the purchase of their first home in order to pay for their own education?
Warren’s proposal is yet another example of our collective misunderstanding of the real problems facing higher education in this country. Instead of bailing out those who don’t need it, our attention and tax dollars should be focused on those who are truly struggling — with degrees and without.
This piece originally appeared at New York Daily News
Beth Akers is a senior fellow at the Manhattan Institute and coauthor of "Game of Loans: The Rhetoric and Reality of Student Debt." Follow her on Twitter here.
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