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Let's Talk About Student Debt



Today Bernie Sanders, along with Ilhan Omar and other members of Congress, has announced a plan to cancel all student debt via federal spending (less canceling of debt and more the government buying it back from the citizens). He would pay for this by a fraction-of-a-percent tax on all trading on Wall Street. The total student debt in this country is now roughly 1.6 trillion dollars, something like 4-5% of our annual GDP. That makes student loans functionally an entire sector of our economy. So I want to talk about the moral case for student loan forgiveness, as well as the practical economic case, and then look at a variety of plans being proposed.


First - student loans aren't bad in theory. If you want a better education that leads to a higher-paying job, that education should cost more. The big argument against student loans has more to do with implementation - stories of people taking out 60k in loans and paying more than double that to pay them off, absurd and adjustable interest rates, the lack of income-based repayment, etc. There's a reason the amount of money tied up in student loans has far outpaced the number of people going to college and rising tuition rates. As smarter people than me have pointed out, the mechanics of getting and repaying these loans are intentionally confusing and bureaucratic, leading to buried fine print and impossible-to-understand repayment schemes that trap borrowers in plans for decades. At a certain point, a student loan becomes a much larger version of a predatory payday loan with the same amount of ability to get out from under it.


We tend to look at student loans as people borrowing money from the government or the private sector, rather than the public investing in the education opportunities of other citizens. We live in a post-developed economy that relies primarily on the service sector, making a college education more-or-less necessary for economic advancement. But if you need a college degree to make it into the middle (or upper middle) class, and you're paying that degree off for 20-30 years, it severely limits a person's ability to do things like build credit, buy a home and get equity, start a small business, or spend money on goods and services. Ultimately it's another symptom of the vanishing middle class - one class of people forever indebted to big banks and landlords and another class making money off of having money to lend; one class shopping at Wal-Mart and the other buying bespoke clothing, with nobody in the middle to fund the small business owner. Home ownership among the middle class and younger generations is vanishing and of course it is: if you're paying off debt into your 30s, when would you ever have the time to save money to own a home? And home ownership - and the ability to borrow against the equity in a home - is one of the biggest pieces of being in the middle class. Increasingly we're a nation of renters and landlords and that's economically detrimental to everyone.


If college graduates are earning higher salaries only to pay debt to giant banks - banks that, coincidentally, just had their corporate tax rate cut significantly - the US government isn't actually seeing the benefit of the investment we're making in getting people through college in the first place. We're just creating a ton of debt for the big banks, banks who aren't even paying taxes on their increased revenue (for example, the corporate tax rate is now 21% while an individual making 38,700 dollars a year pays 22%). And I don't mean to single out the banking industry here, but it raises a whole lot of questions when we're transferring wealth from individuals making 40k a year and paying 22% in taxes (and it only goes up from there) to corporations paying 21% a year in taxes (and it's realistically lower).


So there's a moral and an economic argument to curbing the amount of student debt in this country. If the only goal of giving people the economic opportunity of an education is that they have enough money to pay back the economic opportunity...what was the point? From the US government's perspective, a non-graduate making 25k a year with no debt is functionally as useful as someone making 50k with a significant portion of their income going to debt repayment.


Now, onto the plans. The problem with student debt is that it's such a massive amount of money that any one-size-fits-all solution will be wildly expensive and could have short-term economic consequences, which could defeat the purpose (being debt-free isn't a tremendous help if you're unemployed). Bernie Sanders' plan calls for taxing Wall Street trades in order to raise 1.6 trillion over 10 years and just buy out all existing debt. This would function alongside a plan to significantly reduce or eliminate tuition costs at state universities. The problem many people will raise with this plan is that eliminating debt for high earners is giving relief to people who don't actually need it. Sanders would argue that plans that help everyone are more politically viable and likely to get broad support. He's also making a more explicit moral argument against the idea of student loans in general.


Elizabeth Warren's plan calls for a wealth tax (on total net wealth rather than annual earnings) and would pay down the debt of 1/3 of borrows - around 600 billion dollars. Her plan is also scaled - the people who earn the least would benefit the most, and at a certain salary level there would be 0 dollars of federal debt forgiveness.


Julian Castro has proposed a plan that would freeze debt repayments until individuals earn a certain amount (I believe 2.5x of the poverty line) around 56k per year. This way people just starting out wouldn't have to grapple with paying rent or paying student debt. But it's obviously less aggressive than either Warren or Sanders' plan. When Hillary Clinton ran in 2016, she had a more nuanced version of this plan designed to spur entrepreneurship - anyone that wanted to launch a startup out of college could defer their debt repayment, but if the startup was successful they'd have to pay it back at a higher interest rate.


Ultimately all of these plans speak to the same fundamental question(s): how do we allow college graduates to build things - whether it's companies, small businesses, or just home equity - and strengthen the ever-shrinking middle class? What good is a college degree if you're locking yourself into decades of servitude to pay for it? How do we empower recent graduates to use that knowledge and expertise to get ahead? Why do we look at this as borrowers owing the government money instead of a public investment in our own middle class?


Ultimately all of these plans will be derided to some extent as "giveaways" and "handouts" and what-have-you. But economics is ultimately a zero-sum game. In the current system an entire generation is giving away their chance at home ownership to Wells-Fargo. We're handing out a trillion dollars to banks due to interest rates that make escaping the loan repayment virtually impossible. We're giving away the disposable income we could be using to support local businesses. Money doesn't just evaporate - even these plans doesn't just magic the debt out of existence. They ask what a better use of our money is - debt repayment or investment, investment in homes, in cars, in each other. These plans ask what Americans could do if we weren't chained to debt for decades - decades! - of our lives. What new tech revolution we could launch, what new scientific breakthroughs we could make, what new small businesses we could start.


We've taken for granted the idea that a college degree requires an absurd amount of debt. Now we're not just questioning why that system exists, or who it benefits, but what possibilities we could achieve if we rethought the nature of borrowers and lenders, if we started to think in terms of making an investment in our fellow citizens, in future generations, in the promise of tomorrow. Because ultimately that investment will get paid back with interest far beyond what student loans are getting right now.

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