WASHINGTON. Democratic presidential hopeful Senator Elizabeth Warren wants to forgive all student loan obligations and make colleges tuition-free for all Americans. She says the $1.5 trillion in student loan debt that college grads now carry is “crushing millions of families and acting as an anchor on our economy.”
She wants college to be “a basic public good that should be available to everyone with free tuition and zero debt at graduation.” This is the same way that K-12 education is delivered. While we have always viewed education as a public good for children, we have never viewed education as a public good for over 18-year-old adults.
What about the cost of the Elizabeth Warren student loan forgiveness plan?
The cost of this so-called “free plan” to the American taxpayer would be staggering. By her calculation, the student loan forgiveness scheme Elizabeth Warren proposes would cost approximately $640 billion. Since she would forgive debt for up to 95% of the 45 million people with student debt, who owe an average of more than $30,000, the cost would likely exceed $1.2 trillion.
Additionally, the cost of providing free college tuition would be an additional $1.25 trillion over the next decade. Since nearly all Americans believe the Federal government budget deficit is too high, these student loan forgiveness plans would necessarily have to be financed by raising taxes.
Elizabeth Warren would raise tax revenue by creating an Ultra-millionaire tax. That’s a 2% annual tax on all families with $50 million or more of wealth — not income. Her advisors claim this would raise about $200 billion annually. But significant debate continues regarding this figure.
When “good” ideas become bad
All this may still seem like a good idea. It is, in fact, just the opposite. Warren’s “plan” is yet another scheme contrived to take income away from adults who have earned it and give it away to able-bodied adults who, for whatever reason, did not earn it. This, like all income redistribution schemes, tends to slow economic growth while lowering work incentives as well..
This holds especially true in today’s capital intensive economy. By over-taxing, the wealthy, the goverment reduces the formation of new capital. The increased taxes reduce the amount of capital the wealthy have to invest. Less capital means less growth in a capital intensive, full employment economy such as the one we currently enjoy.
But put aside for a moment its cost and the overall negative impact on economic growth. The student loan forgiveness plan proposed by Elizabeth Warren offers even more negatives to American taxpayers. If the government is paying for each student’s tuition, the government would likely impose some restrictions on tuition and other activities. Many may regard this as a good thing. But placing restrictions on prices and activities always leads to market distortions and an ultimate decline in product quality. In academia, that’s a disaster.
More negative impacts
Each student may confront additional negative impacts. In the long run, free college tuition promises to prove very, very expensive. Why? While students attend college, taxpayers foot their tuition tuition bills rather than the students themselves. But after graduation, the student becomes the taxpayer — a taxpayer now permanently on the hook for all other students at present and to come. For the rest of their working lives, all these now former students will pay additional taxes to cover the cost of currently enrolled college students.
Warren claims only the wealthy will pay more taxes for her student loan plan. But, added to the other new or increased taxes Warren proposes — such as Medicare for All, which she claims as a right — her student loan forgiveness plan will eventually cause the middle-class tax burden to rise.
Even more disturbing about her student loan forgiveness proposal: the negative impact the plan imposes on American the general welfare of America’s young people. Traditionally, college provides an educational environment in which a child transforms into an adult. Part of becoming an adult is learning to shift away from social responsibility, where someone takes care of the child, and toward individual responsibility where individuals learn to take care of themselves.
Once student observes that the government handles the college tuition bill, that student feels less individual responsibility to society. Starting out in the working world in their early 20s, today’s young adults are expected to understand the concept of individual responsibility. Lacking that crucial understanding success in life becomes difficult.
Student loan debt not really the problem
Currently, a college student graduates, on average, with about $30,000 in student loan debt, though that figure is rising every year. Since the government gives students a ten year period to pay back a student loan, the monthly payment equals roughly the same as a monthly car payment. Inconvenient, but hardly a crushing debt.
The real problem, however, is not the debt itself. Instead, it’s the level of income a student earns while attempting to replay that debt. With sufficient income, the size of the debt payment is easily manageable. The low income many college grads earn in entry level positions arguably results largely because of the US economic that previously existed for more than a decade. In fact, 2005 was the last year that annual US economic growth exceeded 3%. That held true, even though growth did achieve a 2.9% growth rate last year. The year 2000 marked the last time annual growth exceeded 4%.
This long period of economic stagnation resulted in an ongoing lack of opportunity for college grads. This, in turn, caused greater unemployment and underemployment, along with continuing low wages.
Focus on economic policy first
If economic policy increased annual US growth by 3% or 4%, underemployed college grads would begin earning higher incomes. Likewise, new college grads would have more opportunities to earn a high income. Imagine if recent college grads found employment reflecting the value of their degrees. Their monthly car payments or tuition-repayments likely wouldn’t be a crushing burden.
Fortunately, the Trump administration’s top economic priority is robust growth in all economic sectors. This year, US growth will likely exceed 3%. As for the future? The Trump administration’s policies of low taxes, less regulation and more economic freedom could result in even higher growth. That would easily solve the student debt crisis. And it would do so without the need for a massive new entitlement program like the the student loan forgiveness plan Elizabeth Warren envisions.
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