Elizabeth Warren and Democrats in 2020 election offer student loan relief

Americans owe $ 1.57 trillion in student debt, a figure that sounded the alarm on the potential economic damage due to widespread default or lower consumer spending. To help struggling borrowers, some White House candidates for 2020 have embraced an idea once on the sidelines of politics: forgive much of that debt.

Senator Elizabeth Warren, D-Mass., Is the most prominent Democrat to call for widespread relief for borrowers. She on Monday released a plan to write off at least some student debt owned by 95% of Americans who wear it. Entrepreneur Andrew Yang and Sen. Cory Booker, DN.J., have also said they will be pushing for loan cancellation plans. Senator Bernie Sanders, I-Vt., Helped start the debate with a proposal for a free public university during his 2016 presidential run.

Supporters of student debt forgiveness claim it will shake up the economy, helping Americans who haven’t started a business or bought a home because of their monthly payments. In announcing his plan on Monday, Warren said it “helps millions of families and takes a load off our economy.”

The concept should appeal to young Democratic primary voters buried under student debt. It also sets Democrats apart from the president. Donald trump, Who despite the commitment to “repair” student debt and ordering his administration to find ways to ease the burden on borrowers, proposed to end a popular loan cancellation program and subsidized loans.

But loan forgiveness involves certain risks. The costs of debt relief would be passed on to taxpayers. The benefits could tilt in favor of highly educated borrowers at the top of the income bracket who bear much of the student loan burden – a concern Warren aims to address in his proposal.

While experts studying student debt say a blanket forgiveness would stimulate the economy, some wonder if this is the most effective way to stimulate the economy – or the best way to take the pressure off. the borrowers who need help the most. The backlash could even come from the political left, as general debt relief should benefit higher-income people who have borrowed more to earn higher degrees.

“I think you’re also going to see concerns from the left that if you write off all the debt it would be a pretty regressive thing to do,” said Matthew Chingos, vice president of data and education policy at the Urban Institute. “And once you look at the numbers, it looks like Trump’s tax cuts in terms of beneficiaries. So it’s a little hard to be out there saying, ‘I’m against tax cuts for them. rich, but at the same time I want to give this big gift to the rich. ‘”

As the costs of a university education rise, students have had to borrow more to complete their studies. Total student debt hit $ 1.57 trillion in the fourth quarter of last year, up from about $ 676 billion at the end of 2008.

The average amount of debt per student has increased not only because college costs have increased, but also because public funding for schools has declined, said Cliff Robb, associate professor of consumer science at the University of the Wisconsin-Madison. The problem is particularly pronounced in for-profit institutions: 23% of borrowers who attended one were in arrears on their student loans in 2017, according to the Federal Reserve.

In theory, and often in practice, borrowing to go to school pays off by increasing student opportunities and earning potential. Conventional wisdom says that a college degree increases the student’s salary, which benefits in the long run despite having to repay loans for years or decades.

But getting into debt doesn’t always work. Among students who began pursuing a bachelor’s degree at a four-year institution in 2010, 60 percent completed in six years, according to the National Center for Education Statistics.

This leaves many others who “pay for college, in many cases go into debt to do it, but don’t get the increased income that comes with it,” said Beth Akers, senior researcher at the Manhattan Institute. At the same time, wage growth has not kept pace with the rising cost of education, she added.

If desired, the government can play a more direct role in easing the burden of student debt than by helping with other types of obligations such as credit card or mortgage debt. That’s because the United States held about $ 1.44 trillion in student debt in the fourth quarter of last year, or about 92% of total student loans.

As borrowers face a growing burden and Democrats turn to support from young primary voters, Warren and his rivals have adopted loan cancellation plans. In a video accompanying the announcement of his proposal, Warren defended his proposal in part by saying that “young people can’t buy a house, they can’t start a business.”

Elizabeth Warren’s tweet

The senator’s proposal would eliminate up to $ 50,000 in debt for people with household incomes below $ 100,000, while providing less relief to those with higher incomes. People who earn $ 250,000 or more would not get any forgiveness. To prevent future students from going into debt, Warren is also aiming to make public colleges free.

Yang says he wants to “explore an overall partial reduction” in student loan principal and asking schools to write off a portion of all debts owed by students who do not graduate, among other proposals. Booker also told South Carolina students that he wants to consider a loan remission, although it has not yet published a specific proposal.

Other 2020 candidates such as Sens. Kamala Harris and Kirsten Gillibrand approved Sanders’ free college legislation. These senators, along with Warren and Booker, also approved a debt-free college bill proposed by Senator Brian Schatz.

Plans to alleviate student debt have clear political appeal to voters keen to lose hundreds of dollars in loan payments each month. It remains to be seen, however, how much voters care about student debt compared to other issues.

Liz Smith, a 24-year-old woman who works in advertising in Des Moines, Iowa, says she incurred more than $ 30,000 in debt to go through Iowa State University. Although his loan payments haven’t started yet, Smith recently bought a car and is worried about making car and loan payments at the same time. Yet she currently believes that taking on the debt will be worth it.

“I wish it wasn’t so much debt, but I don’t think I would be able to have a career that I wanted without a degree,” she said.

Smith plans to participate in the first Democratic Iowa caucuses next year and vote in the general election. Although she said the student loan policy was not her top priority, she noted that “it will certainly be good to have a candidate who in my opinion has a good plan for student debt and college costs and makes it all more manageable. “

Loan cancellation proposals will face their share of negative reactions. Some critics will argue that debt relief will disproportionately benefit high income earners or require tax increases to pay it off. It also raises another question: if former students get debt relief, what happens to future borrowers who will have to go into massive debt to complete their education?

Warren’s plan seeks to alleviate some of these concerns by reducing relief for high-income borrowers. So while the bottom four-fifths of the income bracket would all see 80% of loans canceled under his proposal, the top fifth and top 10% of employees would have only 48% and 27% of their obligations canceled, respectively. , according to a Brandeis University study conducted for the Warren campaign.

While people with a household income of less than $ 100,000 would get $ 50,000 in debt forgiven, a person earning $ 130,000 would be entitled to a $ 40,000 rebate, while a person with an income of 160 $ 000 could have $ 30,000 withdrawn from its obligation. People with a household income over $ 250,000 would not receive any relief.

The senator would use her proposed 2% annual tax on families with more than $ 50 million in wealth to offset debt cancellation. His campaign expects the tax to bring in $ 2.75 trillion over a decade. Its plan also includes several provisions to make colleges more affordable in the future, such as a federal investment to eliminate tuition fees in two- and four-year public college programs and the investment of an additional $ 100 billion in universities. Pell grants.

Widespread debt relief may not be politically feasible. Even if a Democrat who proposes it wins the White House, the plan could meet resistance from some Republicans and Democrats in Congress. The GOP currently controls the Senate.

Experts say there are more realistic ways to solve the student loan crisis. First, they say the United States could do a better job educating students and enrolling them in income-based repayment programs, which cap monthly loan payments, often at 10% of discretionary income.

Reducing the wide variety of loans and repayment options available to students could also help them manage their debt.

Chingos of the Urban Institute points to Australia as a possible guide. The country automatically takes an income-based student loan payment from paychecks, which automatically changes with the borrower’s income. Payments don’t start until borrowers reach a certain income threshold.

Other countries are also providing clues on how to ease the loan burden. In Great Britain, students also don’t have to start paying off their debt until they earn a certain amount of money. In Sweden, borrowers have a longer repayment period than in the United States

While these options may not affect the economy as much as widespread forgiveness, many of those studying the issue see them as a more feasible way to resolve the student debt crisis.

“I think there are a lot of Americans who are struggling with student loan debt,” said Robb, of Wisconsin-Madison. “And there should be models in place to assist and help these people. But I don’t know if the answer is as simple as, well, if the debt is universally disappearing, then it’s a lot better for everyone. “

– Additional reporting by CNBC’s Jaden Urbi and CNBC’s John Schoen graphics

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