Elizabeth Warren Shows Us Why Government Must Get Out of the Student Loan Business
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As candidates in the 2020 Democrat primary race try to outbid each other with grandiose promises to voters, the rising level of student loan debt makes for attractive campaign fodder. Making headlines with a plan aimed at addressing the student loan problem is Elizabeth Warren, whose loan forgiveness plan already enjoys the support of more than half the voting population, even among those who do not have student loans .
It’s no mystery why the policy is popular. With government-guaranteed access to loans, combined with a culture that inundates young people with the idea that success depends on a college degree—any college degree—there has been little restraint on borrowing, creating a cycle of rising tuition that necessitates ever-larger loans. Making the situation worse, the consequent increase in university education has effectively eliminated any potential financial return on non-STEM degrees. The problem has begun to reach a tipping point, with “strategic default” becoming a cultural norm .
Libertarians and conservatives are more likely to politically oppose student loan forgiveness. Opposition generally comes from two angles: personal responsibility and economic freedom. On the first point, it is hard to deny the importance of taking responsibility for bad financial decisions, and learning to borrow wisely (or not at all) and repay debts is a vital part of functioning as an adult. Nobody is holding a gun to anybody’s head and forcing them to go to college.
But this does little to solve the very real problem of the millions of young people entering adulthood with $100,000 in debt and an unmarketable degree. And when our reaction to their situation essentially amounts to telling them that they should have had the wisdom to reject a lifetime of cultural and political indoctrination at an age when their brains had not yet fully developed, we shouldn’t be shocked to find them unreceptive to the message.
The matter of economic freedom relates both to the ethics and consequences of a government interceding on voluntarily contracted loans. If Congress gets into the business of wiping out personal debts, the ramifications of such a policy aren’t difficult to imagine. Borrowers are likely to take out larger and riskier loans, and creditors are unlikely to continue lending with the looming possibility of politicians erasing their balance sheet. Alternatively, if the State pays off the loans, the financial burden would in practice translate to borrowers simply paying debts indirectly with taxes high enough to both service the loan and fund whatever inefficient bureaucracy serves as the middle-man.
Less commonly acknowledged, though, is that the United States government currently owns virtually all of the $1.5 trillion in student loan debt. With the passage of the Affordable Care Act, the government effectively nationalized the student loan industry. Today, the government not only guarantees loans, but it also generates substantial revenues from payments. In fact, the profit that the government earns from the student loan industry is roughly double the average profit margin that private companies enjoy.
In effect, student loans have been turned into another form of taxation. True, young people can still choose not to take out loans, but the perverse incentives attached to a nationalized student loan industry make it unlikely that the government is going to end its decades-long practice of indoctrinating elementary school children with why they simply must go to college. And the revenue provided by student loan payments, while negligible in the scope of the national budget, still funds some undoubtedly destructive policy or another.
Given this, we may almost be inclined to believe that Elizabeth Warren has accidentally adopted a libertarian position on student loans. There is no ethical dilemma with the government forgiving debts it owns—that issue only applies to the government forgiving the debt held by private creditors. And there’s always reason to laud reductions in government revenues in any form. At worst, student loan forgiveness fails to teach young people the value of financial responsibility. But even while people can be reckless with credit cards and auto loans, we can at least rest easy knowing that no other loan market has government guarantees compelling credit approval; markets have natural regulations deterring destructive lending (though fewer than would exist without expansionary monetary policy, but that’s a topic for another day).
So what’s the problem with Warren’s plan?
There may be a libertarian case for student loan forgiveness — at least for debts held by the State — but this argument comes with one giant asterisk that Warren and few other politicians would be willing to accept. The government has to get out of the student loan industry entirely. As long as the State continues to hold a monopoly on student lending—and especially while it continues to guarantee loan acceptance—loan forgiveness is merely a recipe for socialized higher education. This, unsurprisingly, is exactly what Warren wants.
Free college—which is really to say, taxpayer financed college—seems to face largely the same problems as the current system of nationalized student lending. Universities would still require funding, creating a tax burden that shouldered by the very people the policy seeks to help. It seems naive to assume that universal college education will see trends different from public schools, which have enjoyed skyrocketing administrative costs with no accompanying gains in student performance . And if young people are going to pay for it whether they go to school or not, bachelor’s degrees will predictably become even more common, and therefore worthless, than they already are.
The only functional difference between Warren’s proposal and the existing system is that currently, for all its moral problems and economic consequences, it is still an option to skip college and avoid the loans, and an increasing number of parents are giving their children this advice. The culture of sanctifying college degrees survives in public bureaucracies, but it’s dying a slow death among private citizens. If college becomes universal, this cultural change will be rendered meaningless. Warren won’t make you go to college, but she’ll still make you pay for it.
We should be sympathetic to the young people who were hoodwinked into entering adulthood with debt that averages a reasonable down payment on a house and a degree that lands them a job as a janitor. But this system, terrible as it is, is still preferable to reforms that would demand other young people to finance the bad decisions of their peers through taxation. Student loan forgiveness combined with universal college simply spreads the consequences of a broken higher education system to the few people smart enough to avoid it. Libertarians can make a case for the forgiveness of government-owned loans, but if forgiveness is couple with the complete privatization of the student loan industry—and that reform is unlikely to win Elizabeth Warren many votes.