Sen. Warren’s debt cancellation plan: Should progressive policy aim for narrow targets or structural change?

April 29th, 2019 at 9:25 am


Sen. Warren’s college debt cancellation plan, which I explain here, has gotten a mixed reception. While many progressives and, predictably, student debt holders give it high praise, it has taken flak from two broad groups: those who just don’t like cancelling debt and those who view it as insufficiently progressive. The latter group objects to the extent to which it helps higher income debtholders who, in their view, don’t need the help relative to those with lower incomes.

Their critique provides a microcosm of a major policy debate for Democrats between progressive targeting on one side versus a broader approach aimed at reducing structural inequalities that have grown to historical proportions. It’s an important debate, as it plays out in Medicare for All versus Medicare for More, subsidized jobs for targeted groups versus guaranteed jobs for all, universal income support versus targeted wage subsidies, and so on.

This essay starts by examining the rationale for college debt relief and then uses Warren’s higher education plan to try to garner some insights into the narrower-versus-broader policy debate. Warning: I do not conclude that one approach dominates the other. In the spirit of full disclosure, I’ll admit that as an older, technocratic, incrementalist who gives significant weight to opportunity costs, I’m congenitally more familiar and comfortable with narrow targeting. But as someone who has, for decades, watched increasingly concentrated wealth and power distort economic and particularly racial outcomes, I’m increasingly open to questioning my priors.

I’ll say little about those who can’t stomach debt cancellation. While I understand where they’re coming from, I wouldn’t let such resentment block useful public policy. Should the government not subsidize health coverage for those without it because the rest of us have long paid our premiums? Was the introduction of Social Security and Medicare unfair to those who had to retire without them? That’s not saying student debt relief is useful public policy or that Warren’s plan is the way to go. It’s saying that the fact that the introduction of any public benefit may be viewed as unfair to those who won’t receive it tells you little about the extent to which that benefit will improve social welfare.

Is college debt reduction good public policy?

Whether debt relief is good public policy and if so, how best to do it, is a more interesting question. The rationale for helping student borrowers is strong. First, K-12 education has long been viewed as a public good, meaning absent government support, the population would under-invest in it with negative economic, social, and political consequences. But, as I said in my earlier piece, 12 is no longer the right number for the high end of that range. Workplace skill demands have steadily increased, driving up the need for a more educated workforce (note that this is a different argument than the ubiquitous, and suspect, claims of skill shortages by many employers).

Second, college tuition (and the ancillary costs, like boarding and textbooks) has increased a lot faster than typical household income incomes (the BLS price index for college tuition and fees rose 63 percent, 2006-16, while nominal median income rose 22 percent). Yes, grants improve affordability, but at public four-year colleges, annual costs increased by $6,300 since 2000, while annual aid increased by less than half that amount. Meanwhile, states have significantly disinvested in higher education (the average state spent 16 percent less—inflation adjusted—per student on public colleges and universities in 2017 than in 2008).

At the same time, the return to college has also gone up and the evidence shows that for many students who complete their degrees, even with loans, college pays off. Still, these two facts—higher ed as a public good and the affordability challenges it poses for many families of limited means, especially for racial minorities—provides a rationale for helping at least some group of student borrowers. A third rationale is that the extent to which the historically large stock of student debt is a negative for the macroeconomy.

Here’s how (my old Obama-era pal) James Kvaal, now the president of The Institute for College Access & Success, recently put it (italics added):

For college to be affordable, students must be able to both make ends meet while enrolled and successfully repay their loans after leaving school. Unfortunately, for many students, one or both of those goals are not possible today. Financial barriers still keep many students from earning college degrees and—while the returns to college are high for those who succeed— there is a crisis for the many students who struggle to repay their loans. A million students a year default.

For these reasons, various debt relief programs already exist, though they are, as Kvaal’s comments suggest, insufficient. Few experts in this area of education policy view the status quo as adequate, and thus, we need to do more.

Critics of Warren’s plan argue it is not progressive enough

And yet, many criticized Warren’s plan for providing more debt relief than is necessary to too many debtors who don’t need the help. That is, they judged the plan to be too generous and not progressive enough because too much debt cancellation goes to upper income borrowers.

The claim is reflected in numbers released both by Warren and outside analysts. An Urban Institute analysis finds that 32 percent of the cancelled debt would go to the bottom 40 percent while 45 would go to the top 40 percent (a Brooking analysis yields similar results). Warren’s materials show that at least 80 percent of all borrower households up to the 80th percentile get full debt cancellation, though this share falls to about half of those in the top fifth.

Given that distribution, columnist David Leonhardt, who has long advocated for helping the neediest in their pursuit of higher ed, worries that the plan will help “a 24-year-old in Silicon Valley making $90,000” thereby confusing “the mild discomforts of the professional class with the true struggles of the middle class and poor.”

To be clear, even by these numbers, because its top benefit ($50,000 applied to debt cancellation) begins to phase down at $100,000 of household income, the plan maintains some degree of progressivity (to which Leonhardt gives a nod) and racial equity. The Urban analysis finds that 56 percent of the debt relief goes to families in the bottom 60 percent, with incomes below $65,000. Warren’s materials show total cancellation for about 90 percent of those with an associate degree or less compared to 25 percent of those with a professional degree or doctorate. Since student borrowing rises with income, and the plan cancels 40 percent of the outstanding debt of 75 percent of borrowers, the 60 percent it doesn’t cancel is mostly held by higher-income families (above the plan’s $250,000 cutoff) with high amounts of debt. Urban’s analysis finds the plan disproportionately helps African-American borrowers (black households are 16 percent of all households, but they receive 25 percent of all cancelled debt).

Still, the plan’s design could be tweaked so that more of its benefits would reach low versus higher-income borrowers. Because higher income families borrow more for college, lowering both the $50,000 forgiveness threshold—say, to $20,000—and more so, starting the phaseout lower—maybe at $60,000 instead of $100,000—would boost progressivity and lower the cost.

The challenge is that when you’re cancelling student debt, because high-end households are more likely to borrow for college and to borrow larger amounts, it’s hard to achieve high progressivity. That’s one reason why many critics of the plan prefer income-based repayment options (where borrowers pay 10 percent of their disposable income to service their debt, which is forgiven after 20-25 years of such payments) and/or, as Leonhardt argues, “an enormous investment in colleges that enroll large numbers of middle-class and lower-income students.”

Is the goal of college debt reduction to help low-income borrowers or to pushback on structural inequality?

Is targeting debt reduction to poorer households clearly the better policy choice in this space? The critics argument—a resonant one—is: in a world of limited resources, why aid “mild discomfort” when you can help those with “true struggles?”

But Warren is coming at the issue from a different perspective. Her purpose is not to parse these two groups. It is the more ambitious (and thus, more expensive and interventionist) goal of resetting the imbalances driven by the vast increase in wealth inequality. Her motivation comes from her oft-stated belief that concentrated wealth equals concentrated power, political influence, and the stripping of opportunities from broad swaths of Americans, most notably racial minorities, and not just the poor.

It is thus not incidental that her higher ed plan (which, as I discuss below, includes a lot more than debt relief), is financed by a tax on extreme wealth that hits the top 0.1 percent of wealth holders. The goal is to claw back some of this narrowly concentrated wealth to provide more opportunities for all the families who face some of costs of these extreme imbalances. No question, it will help some computer engineers and lawyers. But in so doing, the hope is that by reducing that engineer’s debt burden, she will have the freedom to start her own business. A lawyer who benefits from her plan will have the economic space to shun the corporation in favor of public service law.

Viewed through that lens, the Warren plan is not designed to target debt relief to the least well-off. It is instead designed to return some measure of economic security and freedom of choice to 42 million people from across the income distribution who, by dint of their current debt burdens, face economic constraints that she believes public policy should address.

There’s more to the plan, most importantly making two and four your public colleges tuition free. That’s a whole other discussion, though it raises all of these same issues. Re progressive targeting, I’ve seen too few references to the fact that her plan also calls for $100 billion in higher funding for Pell Grants—the program Kvall called “the most important federal commitment to college opportunity.” Given free tuition, these grants would pay non-tuition costs, which for many students outpace their tuition costs.

But none of that negates the opportunity costs invoked by this and other plans with such broad scope. A dollar spent on a $100,000 household is one that isn’t spent on a $20,000 household, and it’s undeniable that the latter needs more help than the former, especially when we consider those students whose upward mobility is most elastic to a quality, higher education are the ones least able to afford it.

But it is also undeniable that, in the face of levels of inequality that we haven’t seen in this country since the 1920s (which, for the record, did not end well), it will take more than narrowly targeted corrections to reset the balance of power and opportunity in America. I don’t know if this or any other big idea is part of the solution. Also, I’ve ignored politics, which I’ve argued elsewhere may be more conductive to targeted incrementalism than sweeping reforms. But those of us who seek economic and racial justice must entertain the possibility that relative to the sorts of ideas we’ve long promoted, it may take a policy agenda that’s bigger, more disruptive, and more ambitious, to start to repair the damage.

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10 comments in reply to "Sen. Warren’s debt cancellation plan: Should progressive policy aim for narrow targets or structural change?"

  1. Tom Cantlon says:

    Glad to see you’re posting. Put me in a different group as far as complaints about Warren’s plan. I have no problem with forgiving debt, and helpful policies can’t always be perfectly progressive, but fixing the college debt problem with a national program irritates a pet peeve.

    The growth of college debt has underlying causes that this won’t address, and in fact will encourage. The problem is partly one of growth of cost beyond what normal market forces would require because, much like health care, it’s not a normal market. It also has to do with states being stingy with funding for state colleges, partly from the crash (one more way people pay for financial gamblers), partly general stinginess, and partly planned as in cut taxes and then cry there aren’t enough funds.

    Compensating for that with a national program is wrong, doesn’t fix the problem, and encourages it to get worse. “Hey, we cut funds to colleges and the feds saved our ass. Let’s keep it up!” It’s the same pattern as with EITC and food stamps for working people. Just lets companies find they really can pay less and people will settle for it because the feds are helping, so wages go lower because they can.

    I would never say we should ignore the debt problem or cut people off of EITC or food stamps, nothing gained by hurting little people, but we should acknowledge these as necessary evils, that they do encourage the problem to worsen, and they have to be in parallel with efforts at the underlying problem.

    Other parts of Warren’s plan are about funding and could be structured to prod state spending. Somehow that’s got to be done.

  2. Jerry Miner says:

    Private returns to college are sufficient to repay debt incurred to cover its cost. The problem arises because of the short duration of most current college loans and issues of employment. As long proposed, income contingent loans are a fundamental remedy with features to allow for borrowing for living expenses while in college and for treatment of marriage. Some loans already have income contingent repayment conditions and other outstanding loans could be converted to income contingent ones. Adoption of such a policy for future college financing would require a considerable amount of initial funding, however.

  3. Fred Donaldson says:

    Graduated high school in 1959 and became a copyboy, age 17, Couldn’t afford college. Parents very poor. No hot water or phone. Worker 48 years without missing a day for unemployment benefits.
    Now, you propose another excuse to cut the government’s debt to Social Security – a rebate for going to college – fancy or otherwise. Reduce SS benefits to pay for it?
    About 80% of the population doesn’t graduate college, so why should they subsidize the 20% for pursuing their dreams.
    Student loans work in Australia. Make less than $20,000 – no repayment required. Otherwise by graduated scale, depending on your income.
    No student loan interest ever charged in Australia and tuition is about $4,000 a semester – never paid for by people who clean or fix your toilet.
    Tackle the problem. We need free public colleges, and anyone else should pay their own way for the title and prestige.

  4. Bob Palmer says:

    A (conservative) friend suggested this for reducing the college debt overhang: Let taxpayers deduct all college loan payments (principal, interest or both) directly from taxable income.

    It’s regressive of course. But even my conservative friends have kids with college debt problems. Young people with college debt burdens are not participating in the economy the way they should be at this time of their lives. And that is a drag, for them and for us, that will continue for the rest of their lives.

    Debt forgiveness raises an equity problem. If we forgive college loan debts in whole or in part, what do we say to an unmarried middle aged woman who has lived in her parents’ basement since graduating and who just now made her final payment?

  5. Stanwood says:

    Unlike several of her other out-of-the-box proposals it seems Warren’s take on college loans misses the big problem.

    College has been heavily subsidized by public funds for decades. But over time we’ve reduced state and federal direct investment and replaced it with federal loan guarantees. The direct investments were subsidies to consumers and put a lid on prices: the size of the subsidy was fixed so a college with rising costs would have to pass those costs directly to their customers. The loan guarantees are a subsidy to banks. Because they are mostly uncapped they have freed colleges to jack up costs while they race to the top in terms of student “experience” (dorms, gyms, pools), administrative overhead, etc. And they have freed states to reduce direct investment because sensitive student populations don’t take an immediate hit from higher tuition bills.

    We need a solution for tuition rising faster than inflation and wages. Warren’s proposal is likely to accelerate tuition growth.

  6. Peter Eggenberger says:

    Warren’s plan is perfect! Political genius! It’s wonkish, it will benefit future members of the upper middle class, and inspire dozens of position papers. Why not a symposium at the Kennedy School to inspire the voters?

  7. Dave says:

    If I’m in charge, cancel the debt.

  8. Marie Fernande Augustin says:

    First, institute free college so this will be the last generation to go through this student loan debt debacle. Second, institute a cross between Warren’s and Sander’s plan but with an income limit; $50K for all AND full debt cancellation if you qualified for a pell grant at the time you acquired your debt.

  9. Cesar says:

    Need to be careful of the Wall Street/financial services sector arguments for debt cancellation. These are based on (1) envy — almost all new education loans since 2010 have been issued by Uncle Sam and (2) a faux concern for the welfare of consumers. #2 means that many advocates for debt cancellation simply want to erase student loan debt in order to “free up headroom” for generations of more consumers to load up on the types of debt that are offered by the financial services sector and which are very profitable to them. Even if there could be found solid evidence that student loans interfere with car buying and home buying, so what! Are we ever going go move beyond the era when people think the America Dream simply means a 4,000 square foot home, with three or four motor vehicles and a dozen credit cards? This is not only a disaster environmentally but also not the sure-fire route to personal happiness that everyone assumes it is. Those on the progressive side who support debt cancellation have inadvertently partnered with the financial sector, and many of these debt awareness and financial literacy organizations are funded in part by the TBTF banks. The Trump Administration has handed the debt cancellation advocates a gift: a fake valuation of the Direct Loan portfolio that artificially reduces the value, which also means it will be cheaper than anyone would have anticipated four years ago to cancel Direct Loan balances.