It’s the season of major student loan reform proposals. Given the sheer volume of ideas being put forth by lawmakers in both major political parties, it’s hard to keep track, and it can be challenging for any one legislator (or any one idea) to stand out.
- The plan would be tied to a borrower’s income, and there would be caps on loan forgiveness. For student loan borrowers with incomes under $100,000, the plan would forgive up to $50,000 in student loans. For borrowers with higher incomes, the debt forgiveness would be gradually scaled back. Someone with an income of $130,000 would get $40,000 in debt canceled, and a person with an income of $160,000 would get $30,000 of debt relief. There would be no loan forgiveness at all for borrowers who earn more than $250,000.
- Warren says her plan would reach nearly 95% of student loan borrowers. After all, the vast majority of student loan borrowers earn less than $250,000 per year. Warren also says that for these borrowers, about 75% of their student debt would be cancelled on average. This makes sense, since the average college graduate leaves school with about $35,000 in debt.
- The plan would be funded with a so-called “ultra-millionaire’s tax.” Warren proposes an additional 2% tax on families with wealth over $50 million, and an additional 1% tax on families who are worth $1 billion or more. She says this tax would only impact around 75,000 families, while the student loan relief could benefit over 30 million families. Warren says her tax would raise around $2.75 trillion over 10 years, more than covering the cost of debt forgiveness, which would be around $1.25 trillion (there is “only” around $1.5 trillion in outstanding student debt to date).
- Warren’s plan also provides for reducing the cost of college. She proposes free undergraduate tuition for all public universities and community colleges. She also wants to expand federal grant programs (such as Pell Grants) to help students — particularly lower income students — cover additional college costs like housing and books.
There is a lot that we don’t know, however. For example, Senator Warren did not make clear whether the plan would only apply to federal student loans, or private student loans as well; however, it likely would need to be limited to federal student loans only, since the government does not necessarily have the authority to unilaterally cancel student loans issued by private lenders. A work-around solution would be to loosen bankruptcy protections for private student loans, an idea that Warren has supported in the past.
We also don’t know how the relief program would be administered. Would it be automatic, or would borrowers need to affirmatively apply? Would the loan forgiveness come all at once, or it would be distributed in stages? And how would this impact borrowers who are currently on track for existing loan forgiveness programs like Public Service Loan Forgiveness?
While there are certainly some unknowns, this is relatively common when new policy proposals are initially rolled out. This is the first time in history that a major presidential candidate has called for widespread student loan cancellation, an idea that has started to gain traction with economists in recent years.
Buckle up, this is going to be an interesting ride.