A Presidential Campaign Proposes Student Debt Cancellation

Today marks a milestone in the policy debate over what to do about the student debt crisis: Senator Elizabeth Warren’s presidential campaign has proposed to eliminate $50,000 worth of debt for anyone earning less than $100,000. The cancellation amount then declines linearly for higher-earning debtors, reaching $0 for people with $250,000 in income. The effect of the policy would be to eliminate or substantially reduce the burden of debt for over 90% of borrowers, which would be a good thing: it’s time to put the failed experiment with student debt to an end.

The advent of the proposal is notable because it recognizes that this country’s student debt policy experiment is, in fact, a failure. We vastly expanded the federal student loan program under the false assumption that more people taking on more higher education credentials would cause them to earn more. This failure of social science justified round after round of funding cuts from state budgets for public education, figuring that it would still be worthwhile for individual students to pay higher tuition and take on the associated debt burden, as well as the construction of the federal higher education financing system in a way that funded students, by offering them loans against their future earnings, rather than supporting institutions.

In fact, as the population has layered on increasing loan amounts to become more educated, each education category has become less and less well-paid. Meanwhile, the routes into the labor market that avoid higher education entirely, and hence student debt, are increasingly a thing of the past. A higher and higher share of entering cohorts are being channeled into some form of higher education, and more of it, in the face of wage stagnation that makes the debt that comes with it increasingly unaffordable. This progressive deterioration of middle class living standards over the life cycle gives rise to the well-cited statistic that the generation entering middle age now will be the first in American history to mostly be economically worse off than their parents. And things will get worse from there.

Why don’t wages rise when workers get more education? Because employers have the power to shift the cost of job training from themselves (and state governments and institutions, who once shouldered the burden of an educated society) and onto workers. Recent evidence has shown that employers who wield greater power in the labor markets where they hire attach higher skill requirements to a given job. Those requirements translate into higher student debt. Crucially, the optimistic interpretation that student debt is “good debt” because it inevitably pays for itself through higher earnings turned out to be a false one: if employers systematically exercise wage-setting power in labor markets, as we know that they do, then workers will be paid less than they are worth. That wedge between wages and worker productivity has only continued to increase over time.

In confronting the problem of student debt, many influential scholars and policy professionals have preferred to ignore this systematic failure and instead focus on acute aspects of the crisis, like delinquency and default, that can be spun so as not to implicate the overall policy. And the statistics on rising cohort default rates over time, even as the labor market has recovered from the Great Recession, are indeed astounding and impossible to reconcile with the notion that student debt “invests” in valuable education, which automatically pays off in the form of higher earnings. But crucial as addressing default is, income-based repayment alone will not actually rectify the student debt crisis. It amounts to patching the leaky boat of rising tuition, rising indebtedness, and stagnant wages at the expense of the federal treasury on the back end. The Warren proposal recognizes that fiscal concerns should not be the overriding ones in constructing sound federal student debt policy. Instead, a comprehensive solution needs to do more than plug those holes. It has to set us up for a new higher education policy paradigm, one in which free, equal, and high-quality public higher education is a universal right with which private financing and private indebtedness is inconsistent.

Finally, the universality of a higher education policy agenda, including student debt cancellation, has to be understood in light of the racial disparities that plague student debt and everything associated with it. While some naïve media coverage portrays student debt as the province of whiny, privileged, over-educated millennials, the reality is that we stopped supporting universal public higher education the moment the beneficiary population started to look very different from the tax base sustaining it. Whereas student debt was once a sign of relative privilege in the cross-section of a single cohort, as it was held exclusively by graduates of professional programs with strong earnings potential, student debt is increasingly a mark of relative deprivation: it means that your parents couldn’t pay for the thing, higher education, that everyone increasingly has to have.

Racial disparities in household wealth, access to credit and labor markets, and segregation within the higher education system, especially with respect to for-profit institutions but an overwhelming factor in access to the traditional nonprofit sector as well, mean that the student debt crisis is yet another facet of the crisis of racial economic inequality. Cancelling student debt isn’t a giveaway to whiny white kids, but rather one crucial piece of breaking down the expensive and discriminatory tollbooth that blocks the path of young people of color to obtaining middle class status. We know that non-white workers use higher education credentials to navigate a discriminatory labor market, and they end up paying the price in terms of longer repayment schedules and higher loan burdens, all on the backs of family backgrounds with far less in the way of a parental wealth cushion. Cancelling student debt is racially egalitarian as it is egalitarian in general. It is also urgently necessary.

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Assistant Professor of Economics at the University of Utah

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