Cancel Student Debt, Boost the Economy
By Alexis Goldstein, Americans for Financial Reform
In April, Senator Elizabeth Warren released a bold plan for free public college and debt cancellation. This transformational proposal takes direct aim at some of the deepest inequities in education in America, and it’s funded by her Ultra-Millionaire tax on wealth above 50 million. The plan includes a $50 billion minimum fund for historically Black colleges and universities (HBCUs) and minority-serving institutions, and will make public college tuition-free at both two- and four-year institutions.
Her plan also takes direct aim at the crippling $1.5 trillion debt burden that America’s student loan borrowers carry, proposing to free millions of people from the lasting limitations those debts are placing on lives and hopes. Perhaps no student loan borrowers have a harder time bearing this burden than those who attended for-profit colleges, who make less after graduating than they did before attending. Among the boldest and bravest part of Warren’s plan is imposing accountability on the for-profit education sector, an industry with a record of law breaking and abuse that is responsible for 34% of student loan defaults, despite only enrolling 9% of post-secondary students. Warren is proposing an all-out ban on for-profit colleges receiving federal student loan money.
Accountability for a recidivist industry: for-profit colleges
It may surprise you to learn that for-profit educational institutions receive taxpayer-backed money at all. But these institutions in fact depend overwhelmingly on public dollars, and receive billions of federal money each year — $14.9 billion in federal grants and loans in the 2017 – 2018 school year, and about $1.7 billion in GI bill money in FY 2017. Top executives in the sector get millions from these public funds: the CEO of the now-bankrupt ITT Tech was paid some $5.4 million in total compensation from 2014-2016. Todd Nelson, CEO of the for-profit Career Education Corporate, made over $5.1 million in 2017. His company just settled with the Attorneys General of 48 states and the District of Columbia for more than $493.7 million, over allegations of misleading prospective students and predatory enrollment tactics.
The entire industry is plagued with malfeasance. David Halperin of the Republic Report has long kept a running list of law enforcement actions and investigations into for-profit colleges. Here is just a small sampling of them:
- Kaplan University, now under contract with Purdue University, settled with the Department of Justice for employing unqualified instructors (2015)
- ITT Technical Institute, prior to its collapse, was sued for predatory lending by the CFPB (2015); investigated by several State Attorneys General for unfair or deceptive practices in marketing and advertising; and the SEC for false and misleading statements that concealed negative information about the company’s financial condition.
- The owner of for-profit Atius Technology Institute pleaded guilty to bribing a public official at the U.S. Department of Veterans Affairs (2018)
- The California attorney general sued the for-profit Bridgepoint / Ashford, for false or misleading statements and unfair and fraudulent business practices (2017)
Why should public dollars be supporting and enabling these abuses?
Cancel Student Debt, Boost the Economy
The Department of Education has long had the legal authority to cancel loans when schools break the law — a regulation known as “Borrower Defense to Repayment” has been in place since the mid-1990s. The Obama Administration, following a flood of applications from former students of the now bankrupt Corinthian Colleges, Inc and advocacy by the Debt Collective, updated these regulations in 2016. Trump Education Secretary Betsy DeVos has been doing her best to not only flout this authority by freezing the debt cancellation owed to students whose schools broke the law. But she also has tried to make it impossible for students to get debt cancellation in the future. Her efforts have thus far failed, thanks to the work of the Project on Predatory Student Lending at Harvard Law, Public Citizen, and 19 state Attorneys General. The group sued to block DeVos’s illegal attempt to delay the 2016 Borrower Defense update, and they won.
While far from sufficient, some former students at predatory for-profits have managed to have their debts cancelled, through the tireless work of student borrowers, an organization known as the Debt Collective, advocates, lawmakers, and state Attorneys General. As of the end of 2018, $534 million in federal loans had been cancelled for 47,942 claims, largely to former students of the disgraced Corinthian Colleges Inc, which faced charges of predatory lending, false job placement statistics, deceptive marketing, securities fraud, and the unlawful use of military seals in advertisements.
But so much more needs to be done — and not just to the former students of for-profits who’ve been waiting for years for cancellation to no avail. Warren’s plan addresses this head on, proposing varying levels of student debt cancellation for anyone not among the 5% of highest income households in the country.
The plan would cancel up to $50,000 total in any student loan type, private or federal, for those with household income below $100,000. The amount cancelled then goes down by $1 for every $3 in extra income a household makes, tapping out at $249,999. Those making above a quarter of a million dollars — the top 5% of Americans — would not receive debt cancellation. (The campaign has created an online tool for people to estimate how much debt cancellation they would receive under the plan). Warren’s plan, importantly, also ensures the debt cancellation is not taxed as income.
Everyone would benefit from the debt cancellation, whether they have student loans or not, due to the economic boom it would likely produce. A study by the Levy Institute at Bard College, written by Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum, showed that student debt cancellation would increase economic activity. They found that for the 10 years following a wide scale debt cancellation:
- GDP would be boosted by between $86 billion and $108 billion per year, on average;
- The average unemployment rate would be lowered by 0.22 to 0.36 percentage points;
- It could add between 1.2 million and 1.5 million jobs per year;
The report points out that they took a very conservative approach, and didn’t include “positive spillover effects” in their simulations, even though research suggests that student debt cancellation could also lead to things like new small business formation, and reduced household vulnerability to business cycle downturns.
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We welcome this and other proposals for free public college, which would help build a more just economy for all of us. Combining free public higher education with debt cancellation would free the country’s student loan borrowers from a burden that shadows lives and restricts opportunities, and it makes good economic sense, too.