Pros and Cons of Senator Elizabeth Warren’s Student Debt Plan

Senator Elizabeth Warren released her student debt relief plan Monday, April 22. The primary components include the following:

  • $50,000 of student debt forgiveness for federal and private student loans
  • Borrowers with household income below $100,000 would receive $50,000 in tax free forgiveness. If you make more than $100,000 as a household, your forgiveness credit would decline by $1 for each $3 of income above the $100,000 income level.  Above $250,000 of household income, you’d receive no forgiveness. For example, a $160,000 income gets you $30,000 of forgiveness. $220,000 of income gets you $10,000 of forgiveness. $260,000 would get you $0.
  • To go along with this short term stimulus, Senator Warren would pass a The Universal Free College program, which would eliminate tuition and fees at every public two and four year college in America.

Sen. Warren’s campaign estimates the cost of this plan at $1.25 trillion over 10 years. She would fund the program with a wealth tax on all families with net worth above $50 million. Is her plan realistic, could it pass, and what does it mean for the state of student loan policy?

Elizabeth Warren Attempts to Make Student Debt Relief Progressive Instead of Regressive

I want Student Loan Planner to focus on the analysis of various student debt proposals. You can sound off in the comments section on what you think of it politically. Warren’s plan aims for drastic relief for the borrowers with the smallest balances, which would obviously cost the least as well.

When politicians call to forgive all student loan debt, they perhaps unknowingly are supporting a regressive policy, meaning most of the benefit would go disproportionately to the wealthiest borrowers. For example, we love making NYU dentists custom plans for their student loan debt. However, forgiving the $600,000 debt of one NYU dentist could cost the same as wiping away the $10,000 debt burdens of 60 borrowers who attended a shady barber school with poor job placement rates.

Very small student loan balances have massive impact on the poorest students. These loan burdens often come from not finishing a degree program.

The vast majority of proposals I’ve seen on student loan reform does not pick up this nuance. Clearly, Senator Warren and her team are paying attention to the details.

Sen. Warren Plan Has Little to Help Borrowers with Huge Balances

To Elizabeth Warren’s credit, she has proposed expanding PSLF and other forgiveness programs in the past. This is a broad student loan plan designed to help the broadest number of people at the lowest possible cost. I imagine she would do a lot if elected to help borrowers with six figure balances, but would not want to telegraph that during a primary battle where messaging and getting focus from the media is super important to win.

Unfortunately, one area where her plan is lacking is how we could stem the problem of graduate programs who’ve decided to raise their prices to sky high levels in the face of zero underwriting standards for debt. Physicians would still be in great shape with PSLF under President Warren. However, veterinarians, dentists, chiropractors, and other groups with little access to PSLF eligible jobs seem to have gotten little attention from Senator Warren and frankly all the Democratic presidential candidates in 2020.

Physicians However Could Continue to Benefit from Student Loan Loopholes

Most readers of student loan blogs know that the Public Service Loan Forgiveness program has a wonderful loophole for physicians who work for 501c3 and government employers (like hospital systems). Getting credit for the years worked in residency and fellowship training allows many physicians to get most of their loan burden forgiven tax free.

It depends on the text of Warren’s plan, but I could see a scenario where a future gastroenterology fellow with $60,000 of income could receive the $50,000 of tax free loan forgiveness. This would be worth approximately $100,000 in pretax salary, since I’d presume he or she could have a 50% marginal combined tax rate as an attending, when that money would have to be paid back if refinanced privately.

Senator Warren’s Student Loan Plan Would Encounter Fierce Resistance from Republicans and Possibly Need a Constitutional Amendment

I don’t think that Senator Warren’s plan has a shot at passing unless Democrats retake the Senate, keep the House, and if she takes the White House. All three things would need to happen in 2020 for Warren’s student loan plan to happen. Republicans are clearly opposed to it by the reaction on some conservative media outlets.

If you want to sound off on your opinion in the comments about the wealth tax, I’d love to hear it. The wealth tax has been popularized by the Senator, and there is a good reason why she’s proposed this instead of an income tax. Amazon famously pays almost nothing in income taxes, and its founder Jeff Bezos likely liquidates very few shares, resulting in little income tax payable to the government.

Warren Buffet, another one of the wealthiest individuals in the world, uses charitable bequests and the deferral of capital gains to avoid taxes on most of his income. Hence, Senator Warren is going after the market value of their assets to fund progressive policies. While Congress has the power to levy an income tax thanks to the Sixteenth Amendment, scholars disagree if a tax on wealth while someone is still living is constitutional or not. It would certainly face a battle likely leading up to the Supreme Court.

Funding Senator Warren’s Student Loan Reform Would Be Challenging with a Wealth Tax

I am not sure how the wealth tax would work in practice. The wealthy are notorious for their skill in hiring highly intelligent tax and legal professionals. Many lousy, expensive financial products in existence today got their start from earlier tax regimes in the 1970s and before where the highest marginal rates were well above 60%.

Sen. Warren calls her funding plan the Ultramillionaire’s tax. I don’t see that plan covering the cost of free college for everyone because of the limited population it would tax as well as the likely avoidance effort that would occur.

To truly create free college for all, some level of additional tax increases would probably be required on middle income earners. However, a progressive tax increase could certainly pay for a large chunk of Warren’s proposal.

Could Private Loans Actually Be Paid Off with a Federal Program?

While her proposal calls for paying off private as well as federal loans with her one time $50,000 forgiveness, I wonder if that’s actually legal. That could significantly impair prepayment models of banks and other lenders and they might sue due to lost interest income. I am not defending these companies, rather I wonder how practical it is to forgive debt that’s not on the federal balance sheet.

The FFEL program debt has always been treated in a weird way with new federal student loan reform proposals. That’s because the debt is issued by banks but guaranteed by the federal government. That’s one reason consolidation is necessary to make FFEL loans eligible for new repayment programs. I’m not sure the original agreements with financial institutions allowed for the most generous forgiveness provisions like PSLF.

Senator Warren’s Student Loan Plan Shows Potential for Generous Changes in Student Loan Rules

Every time I turn around these days, there seems to be a new proposal for helping student loan borrowers with ever more generous terms. Senator Kaine and Senator Gillibrand made a big effort to expand PSLF this year. Republican Senator Lamar Alexander even wants to allow an income driven repayment to come directly out of your paycheck. It might even exempt spousal income from the payment calculation.

Despite the media and posts I’ve seen on social media decrying how the government earns a profit on student loans, politicians long term have no desire to make a large financial return for the taxpayer on direct federal lending. They have made this clear by not imposing limits on borrowing for schools and passing ever more generous repayment or forgiveness programs. Note the percent of your income going to loans has only ever gone down since 2007, not up.

If a Democrat wins in 2020, I would expect a significantly large amount of money to go to new federal student loan relief. Senator Warren’s is among the most well thought out I’ve seen so far, even if you disagree with her approach.

What do you think of Senator Elizabeth Warren’s plan to forgive a large number of borrowers’ student loans? Do you think it’s unfair to borrowers who owe significantly more than that? Comment below!

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