Bernie Sanders' and Elizabeth Warren's plans to cancel student debt won't solve the real problem with college loans

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Sanders and Warren in July 2019.

• Bernie Sanders and Elizabeth Warren want to cancel $1.6 trillion in student-loan debt.
• But neither of their plans would address one of the underlying causes for the crisis: Federally guaranteed loans incentivize colleges to continue to raise tuition.
• A 2015 study by the Federal Reserve Bank of New York found subsidized loan maximums represent a "pass-through effect" that adds $0.60 on the dollar to tuition.
• If the government curbed its seemingly boundless supply of student-loan funds, tuition costs would almost certainly drop as a result.
• This is an opinion column. The thoughts expressed are those of the author.
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Sens. Bernie Sanders and Elizabeth Warren both promise to cancel student-loan debt if elected president.

Sanders has called for cancelling all student-loan debt, then capping future interest rates on such loans at 1.88%. Warren's plan to unilaterally cancel student-loan debt on day one of her presidency is slightly more limited, with a cap of $50,000 per borrower.

Unfortunately, neither plan would do much to change the conditions that got us into the spiraling college affordability crisis in the first place.

Warren's proposal includes efforts "to rein in the for-profit college industry, crack down on predatory student lending, and combat the racial disparities in our higher-education system" That's fine, but it's little more than a Band-Aid on a gaping wound.

That's probably because identifying the real villain of the student-loan crisis runs counterintuitive to Sanders' and Warren's throw-money-at-the-problem philosophy.

The secret? There's strong evidence that federally subsidized student loans are the single greatest factor contributing to the explosive rise in higher-education tuitions over the past several decades.

Studies have looked into the idea that the very existence of federally guaranteed loans incentivizes colleges to continue to raise tuition, an idea called the Bennett hypothesis, named after former Secretary of Education William Bennett. By backing the loans, the government guarantees the schools will get their money, and the loans help ensure rising costs won't lead to a drop in demand. It's a win-win for the colleges.

But if results count for anything, the currently constructed system of government-subsidized student loans represents an abject failure.

The primary cause of the student-loan crisis is an untouchable topic

The average price of college tuition rose 53% between 2001 and 2017, adjusted for inflation. And that's just the "sticker price."

Additional expenses incurred by students and parents during secondary education abound. Not least among them is the interest on student-loan debt - which is not counted in the aforementioned average and remains long after graduation.

But the forces of supply and demand are not naturally driving the high cost of college. Rather, demand is artificially high because of the increasing amounts of available loans. Too much money is available for degrees that aren't worth it.

A 2015 study by the Federal Reserve Bank of New York found subsidized loan maximums (loans for which the interest is paid by the government while the student is in school) represent a "pass-through effect" that adds $0.60 on the dollar to tuition. For unsubsidized loans, it's $0.20 on the dollar.

The study also cited a 2013 study published by The Econometric Society and a 2016 study published by the National Bureau of Economic Research, both of which found "increases in borrowing limits generate tuition increases" and "borrowing limit increases represent the single most important factor in explaining tuition increases between 1987 and 2010."

Additionally, they said a full 40% of tuition increases can be explained by this factor, adding that "falling state appropriations" to schools are "much less" responsible. The authors of the Fed study said the increase in Pell Grants over the same period produced a "positive but statistically insignificant" effect on rising tuition prices.

But neither Sanders nor Warren nor their 2020 Democratic rivals have taken it upon themselves to address this issue. Instead, the debate has centered on the feasibility of wiping $1.6 trillion in student-loan debt - about 11% of the total US household debt - off the books by executive order.

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We need to talk about the student-loan bubble, not just the debt

Social Security has long been considered the "third rail" in electoral politics. You don't touch it, lest you incur the wrath of tens of thousands of (particularly older) voters.

Student loans might be another third rail, particularly for Democrats.

Moody's Investors Service released a report last week showing that the rate of loan repayment has slowed, and this slowing of repayments - rather than new issuance - is now the primary reason the student-debt bubble continues to grow. Just 3% of loans are repaid in full annually, and that rate is likely going to worsen.

It's a depressing cycle.

If the government keeps raising the limits on its loans, colleges will keep raising prices. After all, they get paid regardless of whether the student defaults on the loan.

The result: Loans are slow to be repaid and interest accrues, and the student-loan-debt bubble grows.

Few would argue that a generation-crippling $1.6 trillion in outstanding debt is a national crisis that needs to be addressed. That's why it's odd for the conversation to never extend beyond debt cancellation.

For political reasons, neither the debt-cancellation advocates nor their Democratic opponents want to touch the idea that the guaranteed student-loan system has fundamental issues. This leads only to a back-and-forth on cancellation, instead of meaningful debate about true reform.

Political expediency aside, this conversation needs to happen.

There will be at least four more Democratic debates, so maybe the remaining candidates should be asked about student-loan debt and the striking publicly available data. It doesn't matter who absorbs the losses or by what authority a president can wipe out a massive amount of debt if we're just going to have this same conversation in a decade.

In a country struggling to fill good-paying vocational jobs that don't require a college degree, we shouldn't assume that secondary education is the answer for everyone.

It's also worth exploring the inherent trade-offs of subsidized student loans.

Access to higher education generally leads to higher incomes, and increases in student-loan limits leads to greater college enrollment. But not all the outcomes are positive.

For example, student-loan debt was deemed a significant factor responsible for the 9-percentage-point drop between 2005 and 2014 in rates of homeownership among people age 24 to 34, according to a 2019 Federal Reserve study. The authors said per capita student-loan debt doubled during that 10-year timeframe.

If the government curbed its seemingly boundless supply of student-loan funds, it's likely that many private liberal-arts colleges would be forced to dispense with some extraneous administrators and other causes of bloat. Tuition costs would almost certainly drop as a result. But we won't know until we at least diagnose the cause of the malady.

Should Sanders or Warren win the presidency and miraculously make $1.6 trillion disappear, that's great for the indebted. But it still leaves all the mechanisms in place for another student-loan bubble.

This is an opinion column. The thoughts expressed are those of the author(s).

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