National Review Online
Tuesday, June 25, 2019
Bernie Sanders, the Brooklyn socialist who represents
Vermont in the Senate and is seeking the Democratic presidential nomination, is
ready to show those Wall Street meanies a thing or two: He’s going to write
them a check for something north of $100 billion. That’ll settle their hash.
The Democratic presidential aspirants are having a
cash-giveaway arms race, coming up with creative ways to shovel public funds
into the pockets of likely primary voters, and Senator Sanders’s plan is to
forgive all college debt, some $1.6 trillion of it. This story will be familiar
to some of you: It’s like Fight Club for people who went to Sarah
Lawrence College. Sanders’s plan would write off all of the student-loan debt
on the federal government’s books — because what’s $1.6 trillion these days? —
but not all of the student debt is government held. Financial institutions hold
more than $100 billion of it, and they’d do well under the Sanders program:
early repayment of principal plus accrued interest and any outstanding
penalties or fees.
U.S. taxpayers won’t do as well.
Like a similar proposal from Senator Elizabeth Warren
(D., Harvard), Sanders’s program is a giveaway for relatively well-off people,
i.e., those who went to college, who on average earn tens of thousands of
dollars a year more than those who did not attend college. The median amount of
student-loan debt is less than $10,000 — about 100 months’ worth of the average
cable bill — and most borrowers pay 5 percent or less of their monthly income
in loan payments. A third of all student debt is held by those in the highest
income quartile, whereas those in the lowest quartile hold only 12 percent.
The majority of all student-loan debt is held by people
with graduate degrees. What this means is that relatively low-income
people who never went to college are being taxed to subsidize the careers of
people who went to law school or who took other advanced degrees. Poor people
are not as important to the Democratic coalition as they once were.
Worse, Sanders’s plan creates permanent perverse
incentives for young Americans to take on even more debt. For one thing, it may
create the expectation that this giveaway will not be a one-time thing. More
concretely, it would fix interest rates on student loans at less than 2
percent. With the U.S. inflation rate hovering around 2 percent, it would make
more financial sense for students to borrow 100 percent of their education
expenses — indeed, to borrow all the money they can — rather than see their families
dip into their own pockets. Which means that if the Sanders plan were passed,
then the most likely result would be that we would see record student debt just
a few years down the road.
America’s colleges are run by reasonably clever people.
Put trillions of dollars in free money on the table, and they’ll figure out a
way to absorb it. Indeed, subsidized student borrowing is believed by many
economists to be an important driver of tuition inflation.
Senator Sanders says he would pay for this bonanza with a
tax on “Wall Street speculation,” i.e. a tax on savings. That’s the
contemporary Democratic party: taxing savings to subsidize debt for relatively
affluent people. The Sanders plan would mean paying $25 to the federal
government every time you traded $5,000 worth of stock — or five times what
you’d pay the typical online brokerage in fees. Over the long term, that imposes
serious costs on actively traded funds such as the ones containing many
Americans’ retirement funds. For example, if the fund that manages the
retirement money of California’s public-sector employees were to sell off its
Microsoft position, those retirees would be obliged to pay $11 million in new
taxes — on top of what they already are paying.
This will be a windfall for college administrators,
giving them additional headroom to raise tuition. Administrator salaries
already are among the fastest-growing areas of college spending: The president
of the University of Massachusetts system was compensated to the tune of nearly
$800,000 in 2016. Why not give yourself a raise? It isn’t your money.
This is bad fiscal policy, bad education policy, and
poisonous politics. If that is a foretaste of 2020, it is going to be an ugly
scene.
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