Elizabeth Warren's plan to forgive student loan debt is costly, but it could actually pour money into the US economy

Sarah Gray,Sarah Gray

Apr 26, 2019, 10:25 IST

Elizabeth Warren's plan to forgive student loan debt is costly, but it could actually pour money into the US economy

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Democratic presidential candidate Sen. Elizabeth Warren (D-MA).

Sen. Elizabeth Warren, a Democrat from Massachusetts and 2020 presidential candidate, released her proposal to erase a good portion of student loan debt and provide free public college.
The plan was met with mixed reviews online: people were either angry that they had already paid their loans back, or chose a different college to avoid debt in the first place, while others praised her for the move.
Dr. Josh Bivens, research director at the left-leaning Economic Policy Institute, explained in an email to INSIDER that the "short-run macro benefits are neutral to good."
Whether voters are fans of the plan or not (and there are plenty who are not), Warren's proposal has put student debt front and center of the 2020 election debate.
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Sen. Elizabeth Warren, a Democrat from Massachusetts and 2020 presidential candidate, released her proposal to erase a good portion of student loan debt and provide free public college.

The plan, released earlier this week, was met with mixed reviews, with Twitter users debating whether it was equitable to people who had already paid off their loans, or those who selected a different school to avoid education debt.

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In terms of effects on the US economy, some experts think a plan like Warren's could act as a stimulus.

What the big deal with student debt?

Student debt in the United States ballooned to $1.57 trillion in the last quarter of 2018. It's held by more than 40 million borrowers, according to the US Department of Education, and in 2017, the average amount of debt held was $28,500.

This can lead debt-holders to postpone hitting some common benchmarks of adulthood, like buying a home, adding to long-term savings, or paying off other debt. A Bankrate survey published earlier this year found that "73 percent of respondents have delayed at least one major life milestone because of their student loan debt," CNBC reported.

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Warren's proposal aims to lessen the burden on borrowers.

It would do the following:

Cancel $50,000 of debt for those in households making less than $100,000 per year.
It would also lessen the debt burden for those making between $100,000 and $250,000, cancelling out $1 of debt for every $3 in income above $100,000. (For example, if you made $160,000, $30,000 of your student loan debt would be cancelled.) No debt cancellation will be offered for those making more than $250,000 (the top 5% of earners).
The debt that was cancelled would not be taxed as income.
Debt-holders with private loans are also eligible for debt cancellation.
Additionally, Warren's plan would provide tuition-free public college, to help future generations stave off student loan debt.

According to a blog post Warren published on Medium, 75% will have their loan debt completely cancelled, and 95% of people with student loan debt will see some relief.

Along with her proposal, Warren shared an economic analysis of the plan from Brandeis University, which found that the plan would have "a substantial impact on student debt forgiveness and would greatly benefit households with the least ability to repay." The analysis also found that it would help those for whom higher education was not a major benefit, and would have a positive impact on lessening the racial wealth gap.

Additionally, the analysis from Brandeis University said it had the potential to boost the economy: "It would likely entail consumer-driven economic stimulus, improved credit scores, greater home-buying rates and housing stability, higher college completion rates, and greater business formation."

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What the experts say about Warren's proposal

Dr. Josh Bivens, research director at the progressive-leaning Economic Policy Institute, told INSIDER the plan's "short-run macro benefits are neutral to good."

"This would certainly boost spending by households, who would be wealthier (since debt has been extinguished) and have more disposable income since debt service payments are no longer needed," Bivens wrote. "There is definitely research indicating that student loan payments are holding back home and car purchases - particularly for young adults.

Bivens said that the "overall effect," however, depends on employment numbers and if the Federal Reserve raises interest rates in response to more spending.

"My sense is that we still have a little bit of daylight between current conditions and unambiguous full employment - so the extra spending really would create some more jobs and income," he explained. "And the Fed has signaled that it might wait until inflation shows up in the data before raising rates."

In 2018, the Levy Economics Institute of Bard College published its own research on one-time student debt cancellation, and found that "such a proposal could have significant benefits for the US economy."

The researchers found that "student debt cancellation results in an increase in GDP, ranging from $861 billion to about $1.08 billion over the entire period, or on average between $86 billion and $108 billion per year." It would also spur job creation.

However, it's important to reiterate that their research focused on debt cancellation for everyone, unlike Warren's which is income-based.

Despite the potential economic stimulus, not everyone is convinced Warren's plan is the right way to give the economy a jolt. Speaking to CNBC, the Manhattan Institute's Beth Akers, said "we can think of better, more efficient ways" to provide an economic boost, noting that debt forgiveness often benefits mainly high-earners.

In response to the tuition-free college aspect, economist Ben Stein told Fox Business the plan was "highly irresponsible."

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A man throws candies from a vintage car as he rides on Main Street in the annual Fourth of July parade in Barnstable Village on Cape Cod, Massachusetts, U.S., July 4, 2018.

What about the cost of this plan? Will it increase the deficit?

Bivens explained that cancelling all student loans would "boost the deficit by roughly $85 billion per year" for 10 years. "To put this in some context, it's about a third as costly as the 2017 Trump tax cut, in fiscal terms," he said.

Additionally, the Levy Economics Institute's research suggests that the impact of cancelling all student loans (which Warren's plan does not do) would be "modest" - roughly 0.29-0.37% of the GDP.

Brandeis University estimates that Warren's one-time debt cancellation proposal would cost the government a lump sum of $640 billion. The cost of providing free public college, per her plan, would cost roughly $1.25 trillion over the course of a decade.

Warren has also put forth a revenue plan for the proposal: "a 2% annual tax on the 75,000 families with $50 million or more in wealth" and 3% for those making more than $1 billion. Over a decade this would raise an estimated $2.75 trillion, according to University of California economists Emmanuel Saez and Gabriel Zucman, who helped Warren with the proposal.

Student loan debt is now front and center

Whether voters are fans of the plan or not, Warren's proposal makes student debt a 2020 campaign issue - one that 57% of millennials under age 30 view as a major problem, according to a Harvard Kennedy School Institute of Politics survey.

In Bivens' opinion, the economic benefits are not even the best argument for forgiving debt: "I think the stronger reasons are fairness and (paired with Warren's plan to make college debt-free going forward) a potentially large boost to college availability, and hence a more-educated and productive (let alone happier) workforce in the future."