Elizabeth Warren Is Right About Student Debt Relief

(Bloomberg Opinion) -- I was one of those college graduates who had difficulty paying off his student loans. It was a long time ago, of course, and the world was a different place. I borrowed directly from a local bank (I can’t recall if the federal government backed the loan). The total amount seems laughably small now: $5,000 or so, paid in installments of about $50 a month.

Then again, $5,000 in 1974, when I graduated, would be $26,000 in today’s dollars. And in any case, since my first few jobs paid little, it was a struggle to come up with that $50. I often slipped three or four months behind, at which point the bank would threaten to send my loan to a collection agency. I would then scramble to find a little money somewhere and get the bank off my back. Until I fell behind again.

In the throes of it, I was pretty bitter about this $5,000 noose around my neck. Today, having struggled to pay off my loan, I would be well within my rights to demand that the current crop of student debtors do the same thing I did: suck it up and pay off their loans, no matter what. From reading Twitter, I can see many baby boomers feel the same way.

One boomer who does not, however, is Democratic presidential candidate Senator Elizabeth Warren. She — as well as rival Senator Bernie Sanders — is proposing a substantial student-loan-forgiveness program. Hers would eliminate “$50,000 worth of student loan debt for 42 million Americans,” according to her issues website. Total student loan debt is now more than $1.5 trillion, according to estimates, higher than any other category of debt after home mortgages. Warren’s plan would erase $1 trillion of that. (Sanders’s plan would go much further and simply wipe all student debt off the nation’s books.)

This being Warren, she ladles her student loan plan with a heaping of progressive rhetoric: “State governments and the federal government decided that instead of treating higher education like our public school system — free and accessible to all Americans — they’d rather cut taxes for billionaires…” and so forth.

But — this also being Warren — she lays out a concrete, practical reason for her loan-relief plan: Student debt, she says, is acting “as an anchor on our economy.” She continues: “It’s reducing home ownership rates. It’s leading fewer people to start businesses. It’s forcing students to drop out of school before getting a degree. It is a problem for all of us.”

She is right on all counts, which is why, however unfair it may seem to those who struggled to pay their student loans, relieving some of that debt burden would benefit the country enormously.

I come at this, in part, as someone who closely covered the foreclosure crisis a decade ago, an event with some parallels to the student-loan crisis. When the Great Recession brought about a collapse in housing prices, millions of Americans were left with mortgages they could no longer afford. Some of those mortgages were the result of greed or stupidity. Others were the result of bad behavior by mortgage brokers who persuaded homebuyers to take out subprime mortgages they were never going to be able to repay. Mostly, though, people were unlucky: They had bought a home only to lose their job, have a medical problem or watch their house drop so much in value that it was, as they said at the time, “underwater.”

And just as there are people today who think that student debtors should suffer the consequences of their borrowing, there were plenty of people then who said that homeowners saddled with subprime mortgages didn’t deserve a government rescue. The Obama administration, which had raced to rescue Wall Street and the big banks, couldn’t bring itself to do the same for homeowners, fearing “moral hazard,” not to mention political blowback from those who would resent the idea that their neighbors might receive a bailout they weren’t getting.

Yet the unwillingness of the government or the banks to modify significant numbers of mortgages prolonged the Great Recession. Once thriving neighborhoods went to seed as banks foreclosed on home after home. The people who had lived in those homes often lost their equity, which had been their only accumulated savings. Meanwhile, as housing prices continued to fall, banks were unwilling to make mortgage loans, making it difficult for people to buy new homes, and the construction industry fell into a funk that lasted longer than the recession itself. The country would have been much better off if the government had allowed people to significantly modify their mortgages, however unfair it may have seemed to other homeowners.

Today, student loan debt is having the same effect on college graduates. Nearly 45 million people owe an average of $28,650, according to Forbes. A quarter of those 45 million owe more than $45,000. Nearly 12% are delinquent, while millions of others struggle to repay their loans, as I once did. And this debt cannot be discharged through bankruptcy, so former students who cannot pay it off are saddled with it forever.

Yes, the economy seems to be doing just fine. Yet this debt, which hits millennials hardest, is a significant drag on the country’s future. In her student-debt white paper, Warren links to a Federal Reserve report showing a 9% drop in homeownership between 2005 and 2014 — years during which student loan debt doubled. “We estimate that roughly 20% of the decline in home ownership among young adults can be attributed to their increased student loan debts,” the authors write.

In 1999, according to the Federal Reserve, about 45% of baby boomers, who were then in their 30s, owned a home. Today, that same data set shows that homeownership among baby boomers is just under 50%, but only 4% of millennials — who are in the same age bracket as boomers 20 years ago — own homes.

Compounding the problem, student loan repayment problems often mean damaged credit scores later in life, making large consumer purchases of all kinds more difficult. Student loan debt has resulted in a decline of 14% in new business formation, according to one study. Black students with student loans drop out of college at a higher rate than white ones. And of course millions of students have been ripped off financially by for-profit colleges that abuse federal student loan programs to make a profit.

The point is an entire generation is being held back economically by debt they took on to get an education. It is deeply counterproductive public policy. You simply can’t have a generation more concerned with paying off student loans than buying a house, starting a company or raising a family.

One great advantage the government has in dealing with the student loan crisis is that it doesn’t have to deal with banks or other financial institutions. The vast majority of student loans are made directly by the government, which can wipe them off the books if it so chooses. A second advantage is that if Warren — or Sanders — were able to do this, it would act as a trillion-dollar stimulus program.

Yes, there would still be those who think it’s unfair. Tom Nichols, a professor at the U.S. Naval War College — and a daily presence on Twitter, where he offers intelligent but often contrarian commentary — told me in a series of exchanges that abolishing student debt was “morally indefensible.” He added:

Partly, I don’t like the fact that it doesn’t take personal choices into account. The kid who stumbled around through a major in basket weaving for six years at some boutique school on loans is not the same thing as the hard-working kid who worked her ass off to get an engineering degree while working and taking loans. It’s just a big magic wand waved over all student loans with no regard to moral hazard.

In fact, some of that moral hazard could work to the country’s advantage. The generation now in college, or about to go, will not be happy seeing their elders getting their debt eliminated or reduced, and they’ll want the same for themselves. Warren, in fact, has proposed making every public university free of charge.

Is that feasible? I don’t know. What I do know is that a student-loan-forgiveness program would cause students and universities alike to question the current model, which allows schools to constantly raise tuition prices knowing the government will supply the loans. If Warren’s debt-forgiveness plan blows that system up, that will be just one more net plus for students — and the economy.

In recent weeks, Warren has said that she believes she has the legal authority to erase that debt the day she becomespresident, without needing congressional approval. I’m not sure if she’s right about that — I’ve seen it argued both ways — but let’s leave that aside for now.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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