Student debt is up to $1.5 trillion dollars. That’s enough to cover our military budget three times each year. Even worse, roughly 10 percent of borrowers are defaulting every year. This debt bubble isn’t as big as the housing bubble that popped in 2007, but it is big enough to be scary. We need a solution, and Elizabeth Warren has certainly made a proposal.
Warren’s Plan
Her first step is to absolve student debt. She’s been asked about this several times, and she has a different answer each time. When you average her responses, she wants to wipe out somewhere between $600 billion and $1.5 trillion in student-loan debt. The weird part is that she claims this will cost $1.3 trillion over 10 years. That doesn’t make sense on any level. Wiping out debt is a one-time cost.
The next part of her plan is to make college tuition free for two-year and four-year programs at public universities. At an absolute minimum, this would cost $150 billion a year ($1.5 trillion over 10 years). More likely, it could easily cost as much as $300 billion to $500 billion a year (up to $5 trillion over 10 years). Thankfully, even though this whole plan will only cost $1.3 trillion over 10 years (obviously Fauxcahontas can’t do math), Warren is going to pay for it all with a 2-percent wealth tax.
There’s so much wrong with this it’s hard to know where to begin. Let’s start with student debt. The majority of student debt is backed by a federal guarantee. This means that the federal government reimburses lenders if the loans default. A fairly large chunk of those loans come directly from federal lending programs.
The point is that the federal government is on the hook for virtually all of these loans if they are absolved. It’s a one-to-one cost to taxpayers. Trying to say it’s some strange 10-year plan is just plain crazy.
The next problem is the cost of tuition. Right now, there are just shy of 15 million students at public universities. That’s the number used to estimate the cost of free tuition, but making that change will undoubtedly lead to an increase in the number of students at these universities. That inflation in demand will come with an inflation in cost. It means that the real cost of Warren’s free tuition could rapidly exceed even the high-end estimates of $500 billion a year.
The last problem with this plan is the wealth tax. She says she wants to tax anyone worth $10 million or more a 2-percent wealth tax. To make the math a little easier, let’s change the rules and tax everyone worth $1 million or more. Assuming no one was able to dodge the tax, it would raise $300 billion — the first year.
The next year, those wealthy people would be worth less, and the wealth tax would generate less revenue. It’s already not enough to pay for the plan, but college will get more expensive with inflation even while the wealth tax produces less money every year.
The worst part is that a wealth tax wreaks havoc on the economy. Let’s consider Jeff Bezos. It’s easy to think that he can afford a simple two-percent tax, but it’s a little complicated.
If the tax went into effect this year, Bezos would owe roughly $3.2 billion to the federal government. Do you really think he has that kind of cash sitting around? No! He’d have to sell roughly three percent of the entire company of Amazon just to pay his tax.
That’s going to seriously impact the value of Amazon. Over all, a wealth tax artificially manipulates markets and just serves as a temporary wealth-redistribution scheme. It’s completely unsustainable.
A Real Solution
Student debt is certainly scary. There’s a better solution. The entire problem is easily fixed by eliminating federally backed loans. That doesn’t make student loans completely disappear, but it changes the risk assessment. Lenders will take prospects more seriously before giving them money. This means that students with a high probability of graduating in fields that lead to good jobs can still get loans. Women’s study majors can’t. It’s good for the system on several levels.
Eliminating the federal guarantee will reduce the number of students in bad majors, and it will lower overall college attendance. This sounds bad until you realize that it won’t reduce the number of college graduates per year (in fields that actually produce for the economy). It makes a college education more valuable, but the reduced demand will actually lower tuition and education costs. That makes it cheaper to dole out scholarships and aid, and it makes college more affordable all around.
Free markets pretty much always work better than government interference. Warren’s plan is just an extreme example. We don’t need more taxes to fix student debt. We just need students and lenders to hold basic accountability for the transaction. As soon as that happens, the problem self-corrects and college stops being a danger to the economy.
Of course, it would also dramatically reduce the indoctrination capability of far-left faculty, so you know that every Democrat will hate this plan.
