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

Sergio Flores/Getty ImagesSen. Elizabeth Warren, a 2020 Democratic presidential candidate.
  • Democratic Sen. Elizabeth Warren of Massachusetts, a 2020 presidential candidate, has proposed erasing a good portion of student-loan debt and providing free public college.
  • The plan was met with mixed reviews online. Some people were angry, saying they had already paid their loans back or chose a different college to avoid debt in the first place, while others praised her move.
  • Josh Bivens, the research director at the left-leaning Economic Policy Institute, told INSIDER in an email 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 in the 2020 election debate.
  • Visit Business Insider’s homepage for more stories.

Democratic Sen. Elizabeth Warren of Massachusetts, a 2020 presidential candidate, has proposed erasing a good portion of student-loan debt and providing free public college.

Her plan, released last week, was met with mixed reviews on Twitter, with some users debating whether it was equitable to people who have already paid off their loans or who selected a different school to avoid education debt.

Meanwhile, some experts think a plan like Warren’s could stimulate the US economy.

What the big deal with student debt?

Student debt in the United States ballooned to $US1.57 trillion in the last quarter of 2018. It’s held by more than 40 million borrowers, according to the US Department of Education. In 2017, the average amount of debt held by a graduate was $US28,500.

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. CNBC reported that a Bankrate survey published earlier this year found that 73% of respondents had “delayed at least one major life milestone because of their student loan debt.”

College graduationDrew Angerer/Getty Images

Warren’s proposal is to lessen the burden on borrowers

She said it would:

  • Cancel $US50,000 of debt for those in households making less than $US100,000 per year.
  • Lessen the debt burden for those making between $US100,000 and $US250,000, cancelling $US1 of debt for every $US3 in income above $US100,000 – for example, if you made $US160,000, $US30,000 of your student-loan debt would be canceled. (No debt cancellation would be offered for those making more than $US250,000, the top 5% of earners.)
  • Prevent taxing the canceled debt as income.
  • Make debt-holders with private loans eligible for debt cancellation.
  • Provide tuition-free public college to help future generations stave off student-loan debt.

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Warren said in her blog post on Medium that 75% of people with student-loan debt would have it canceled and 95% would see some relief.

Warren also shared an economic analysis 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” and those for whom higher education was not a major benefit, as well as help lessen the racial wealth gap.

Additionally, the analysis said Warren’s plan could 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,” it said.

Couple home buyingmonkeybusinessimages/Getty Images

What the experts say about Warren’s proposal

Josh Bivens, the research director at the progressive-leaning Economic Policy Institute, told INSIDER in an email that 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, would depend on employment numbers and whether 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 said. “And the Fed has signalled that it might wait until inflation shows up in the data before raising rates.”

In 2018, the Levy Economics Institute of Bard College published research on one-time student-debt cancellation, finding that “such a proposal could have significant benefits for the U.S. economy.”

The researchers said that “student debt cancellation results in an increase in GDP, ranging from $US861 billion to about $US1,083 billion over the entire period, or on average between $US86 billion and $US108 billion per year.” It would also spur job creation.

However, their research focused on debt cancellation for everyone, unlike Warren’s plan, which is income-based.

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Not everyone is convinced that Warren’s plan is the right way to give the economy a jolt. Beth Akers, a senior fellow at the Manhattan Institute, told CNBC that “we can think of better, more efficient ways” to provide an economic boost, adding that debt forgiveness often benefits mainly high earners.

The economist Ben Stein told Fox Business that the tuition-free-college aspect of the plan was “highly irresponsible.”

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

Bivens said that cancelling all student loans would “boost the deficit by roughly $US85 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.

The Levy Economics Institute’s research suggested that the effect of cancelling all student loans (which Warren’s plan would not do) would be “modest,” roughly 0.29% 0.37% of gross domestic product.

Brandeis University estimated that Warren’s one-time debt-cancellation proposal would cost the government a lump sum of $US640 billion, while providing free public college would cost roughly $US1.25 trillion over a decade.

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Warren also put forth a revenue plan for the proposal: “a 2% annual tax on the 75,000 families with $US50 million or more in wealth” and 3% for those making more than $US1 billion.

Over a decade, this could raise $US2.75 trillion, according to Emmanuel Saez and Gabriel Zucman, University of California economists 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 – and one that 57% of millennials under age 30 view as a major problem, a Harvard Kennedy School Institute of Politics survey found.

Bivens said that in his 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,” Bivens said.

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