Canceling Student Loan Debt Doesn’t Make Problems Disappear

Senator Bernie Sanders on Monday proposed canceling all $1.6 trillion of outstanding student loan debt in the United States, one-upping a rival for the Democratic presidential nomination, Senator Elizabeth Warren, who has proposed canceling $640 billion of the debt.

But there is a potential problem with the Sanders plan, and, to a lesser extent, the Warren plan. Their solutions for the past and plans for the future don’t line up.

The scope of higher education borrowing is vast. There are over 44 million student debtors, and researchers estimate that as many as 40 percent could default. Other Democratic candidates have put forth proposals to make college cheaper and debt easier to repay. But none of the plans are so big as those from Mr. Sanders and Ms. Warren.

“I don’t often use the phrase, but today we are, in fact, offering a revolutionary proposal” that will let people “get all of the education that they need to live out their dreams,” Mr. Sanders said in introducing his bill.

Both Mr. Sanders and Ms. Warren, who is sponsoring a separate bill, have proposed making all undergraduate programs at public colleges and universities free. That would reduce the need for borrowing. But it would not eliminate future student debt — not even close.

That’s because most student loan debt isn’t taken out to attend undergraduate programs at public colleges and universities. Most loans are used for private colleges, for-profit colleges and, most of all, graduate school.

According to the Department of Education, only 45 percent of student loans are used to attend public colleges and universities, presumably because tuition at those schools is already lower than in the private sector.

The department also reports that 40 percent of loans are taken out to attend graduate or professional school — for example, master’s and Ph.D. programs, law school, business school and medical school. This number is large because graduate school is expensive and, in contrast with loans for undergraduates, there is no hard cap on how much money students can borrow from the federal government for graduate school. People can borrow the full cost of tuition, books, supplies and living expenses to attend any accredited graduate or professional program. This is why hundreds of graduate programs produce average loan balances of $100,000 or more.

Combine the two statistics, and it’s clear that the majority of all student loans are taken out to attend private colleges or graduate school.

This means that the day after Senator Sanders “hits the reset button,” as he put it in the news conference, the national student debt odometer would begin rapidly spinning again.

Will those later debts be forgiven, too? If not, the plan would create a generation of student loan lottery winners, with losers on either side. People who had already paid back their loans would get nothing. People with future loans would get nothing. People with debt on the day the legislation was enacted would be rewarded.

If, on the other hand, the legislation creates an implicit promise that all kinds of future student debt will also be forgiven, it could have unintended consequences.

The Sanders and Warren plans control the cost of public undergraduate education by setting tuition to zero and keeping it there. So financing public higher education would become a matter of the federal government and states deciding how much they want to spend on higher learning. The universities would have no pricing power, because there would be no prices.

Graduate programs, by contrast, would still be mostly free to charge whatever they like, as is the case today. With the precedent of loan forgiveness established, graduate programs could be tempted to charge even more, since students might never have to pay back their loans.

Although the Warren plan would not arrest the exorbitant cost of graduate school, it has provisions that could limit unintended consequences to some degree. The plan would limit past loan forgiveness to $50,000, and only for families earning less than $100,000 per year. (Families earning up to $250,000 would receive partial forgiveness.) The Warren campaign estimates that only 47 percent of master’s degree borrowers and 27 percent of Ph.D. and professional school borrowers would have all of their loans forgiven.

The Sanders plan has no limits. It simply cancels all student debt. Keane Bhatt, a spokesman for Mr. Sanders, notes that the plan would substantially reduce interest rates on future graduate student loans, which are currently as high as 8.5 percent, and encourage states to limit graduate school tuition increases in public university systems. But he acknowledged that the plan would not make graduate and professional school free, or regulate private universities.

The Sanders and Warren plans would, in different ways, provide more funding for private nonprofit colleges that serve low-income and minority students. But neither would make a significant dent in overall private college borrowing.

Although the nation’s $1.6 trillion outstanding student loan balance is shocking in the aggregate, it’s composed of many different kinds of borrowers and many different academic programs. The Sanders and Warren plans illustrate the difficulty of moving from big-picture numbers and slogans to the nuts and bolts of federal policy.

Kevin Carey directs the education policy program at New America. You can follow him on Twitter at @kevincarey1.