Massachusetts Senator Elizabeth Warren recently jolted the Democratic presidential primary race by tackling one of the most important issues of our time: student loans and the cost of higher education. Warren called for canceling up to $50,000 of student loan debt for every American making under $100,000 a year. In addition, she would make two- and four-year public college tuitions free for all new students.
The total cost of Warren’s plan would be $1.25 trillion over 10 years, with the debt forgiveness portion consisting of a one-time cost of $640 billion. Warren plans to pay for her plan by imposing an annual tax of 2 percent on all families that have $50 million or more in wealth.
Warren is right to focus attention on the matter of student loans. This is a major issue for young people and experts have been warning of a crisis for years.
But in most cases, it isn’t right to blame student loan borrowers for their predicaments. After all, they are victims of a scam perpetrated by the education cartel and the federal government.
Here’s how it works: the education cartel sells the lie that only those with four-year college degrees can succeed in life. Then they steer everyone with a pulse towards a university.
The government steps in and subsidizes student loans that allow almost anyone to go to college, regardless of their ability to pay the loans back. These loans are a trap, and not just with regard to their cost. The government, which took over the student loan industry, forbids borrowers from discharging that debt in bankruptcy proceedings.
How do such cheap and easy student loans affect universities? For starters, they have caused a proliferation of degrees that offer poor returns on investment. In addition, they have led to the dilution of the value of previously marketable degrees such as those in the humanities and international relations, as more students enter those programs than could ever hope to work in their respective fields. For example, in 2013, half of all those who had graduated from college were working in jobs that did not require degrees.
But worst of all, the easy access to student loans has destroyed the price mechanism, which is so important for determining the real supply and demand of a product. Since government is the ultimate payer, tuition has been pushed sky high. The rate of tuition increase has actually outpaced inflation threefold.
Is Elizabeth Warren’s plan the solution? No! It will only make things worse.
For starters, the wealth tax that she would use to fund her plan is likely unconstitutional. But even if it was upheld by the Supreme Court, it would still be bad policy. Countries that have imposed wealth taxes like France and Sweden have found that the rich simply leave and take their assets with them rather than pay more.
As for the idea of universal student loan debt forgiveness, it is a bad policy on the merits. For starters, it does not make economic sense to forgive the debts of those who will earn at least $17,500 more a year than those who don’t go to college.
Also, although the student loan bubble has been inflated by the actions of both the education cartel and government, at the end of the day, loans are a contract. Those who are able to pay them down should and not be bailed out.
Finally, the idea of tuition-free college is absurd. All this would do is make a college degree worth little more than a high school diploma is now. It would devalue all currently existing degrees and drive down wages even further for college grads.
A better long-term solution is to reduce the cost of college tuition by restoring free markets to education.
How do we do that? First, we get the government out of the student loan business. Second, we need to stop subsidizing and giving special privileges to student loans. Student loan debt should be dischargeable in bankruptcy court. Finally, we need to restore the price mechanism to higher education so that colleges can have a good idea of supply and demand and price themselves accordingly.
The goal is to have universities and colleges compete for customers like every other business. Students need to have some kind of skin of the game, too, through scholarships or paying for their education themselves. Without that guarantee of easily accessible student loans, universities and colleges will have to innovate and maybe even reduce their costs of tuition and other fees.
We also need to embrace the concept of “return on investment.” Without government guarantees, lenders should charge higher rates for degrees that aren’t marketable and even refuse to make loans if they don’t think students can earn enough money to pay them back.
Finally, we need to promote alternatives to college. There are many well-paying jobs out there that don’t require degrees. There are also apprentice programs offered by organizations like Praxis. We should encourage entrepreneurship, which is how so many in this country have lifted themselves out of poverty. College is not for everyone and there’s no reason to keep promoting that idea.
Kevin Boyd is a freelance writer based in Louisiana. He is a contributor to The Hayride, a southern news and politics site. He has also been published in The American Conservative, The Federalist, The Atlanta Journal-Constitution, and The New York Observer among other publications.