Why College Grads Should Pay Attention to Elizabeth Warren’s $1.25 Trillion Education Plan

Splitting university tuition and fee costs between the states and the federal government just translates into higher state taxes.

Should students be allowed to pay for education after the fact? Democratic presidential candidate Sen. Elizabeth Warren (D-MA) says no, kind of. While cautioning against income-share agreements (ISAs), Warren proposes a system that looks a whole lot like them—but with less choice or security for students.

Various New Taxes

ISAs enable investors to cover the costs of education for students who wish it. In return, students promise to pay that investor a percentage of their income post-graduation. But Warren rejects that idea. She even sent a letter to the Department of Education cautioning the department about the risks that ISAs entail—significant costs on students and a discriminatory impact on minorities.

To cover the whopping $1.25 trillion, her plan splits the costs with the states and institutes a new tax on Americans with over $50 million in assets.

But Warren’s own plan poses similar challenges with little reward. The Massachusetts senator wants the government to cover the cost of higher education by eliminating public tuition, fees, and existing student debt and expanding grants for non-tuition related expenses. And like income-share agreements, her plan to finance these benefits requires graduates to pay—just through higher taxes and lost employment opportunities rather than a percentage of their future income.

Just take a look at Warren’s financing plan. To cover the whopping $1.25 trillion cost of her education proposal, the high-polling presidential candidate suggests splitting the costs of college tuition and fees with the states and instituting a new tax on Americans with over $50 million in assets. And, since you asked, these suggestions won’t even shift costs away from students. They impact everyone—especially recent graduates.

Higher State Taxes

To begin with, splitting university tuition and fee costs between the states and the federal government just translates into higher state taxes. One has only to skim the news to see that states are strapped for cash—especially for education. Ask them to cover more tuition and fees for public universities, and states will feel even more pressure to raise revenue. How they do that will depend on the state, but some are already proposing increases to sales and corporate taxes. For tomorrow’s graduates, these are likely to mean big costs.

Higher sales taxes, for example, disproportionately increase the price of food and other necessities for low-income workers, including students and recent graduates. And higher corporate taxes increase costs for recent grads in terms of fewer job openings and lower salaries. These costs especially challenge minority workers, who tend to occupy the low-wage jobs companies cut when faced with increased costs.

Warren’s wealth tax also imposes costs on graduates in terms of fewer business opportunities. Her tax would be based on assets, which include investments, so taxpayers must pay either through cash reserves or by liquidating their stock. Generally, wealthy people don’t keep much cash on hand, so they would have to liquidate investments. That means pulling funds from businesses that depend on them for growth. Graduates, in turn, would see their job market shrink as business owners lose funding for fresh hires.

Warren’s plan doesn’t require students to commit a percentage of their post-graduation income, but she does impose heavy costs.

Warren’s financing plan doesn’t require students to commit a percentage of their post-graduation income, like income-share agreements, but she does impose heavy costs. And unlike Income Share Agreements, those costs aren’t defined. For example, states that increase sales taxes to accommodate Warren’s demands could leave those increases on the books for decades, forcing graduates to continue paying for their education—and the education of others—well beyond the terms they could have negotiated with an income-share agreement.

Nor are these costs flexible. With Income Share Agreements, students who can’t find jobs can still breathe easy. The agreements require students to pay a certain percentage of their post-graduation income each month. When student income is zero, those payments are also zero. Not so with the costs Warren imposes. No matter how challenging a student’s employment outlook, taxes and business opportunities aren’t going to change procedure just to give them a hand.

An Inescapable Deal

Worst of all, unlike private income-share agreements, where students can leave a bad deal and negotiate for a better one, Warren’s plan leaves students with no way out.

To be sure, there are drawbacks to private income-share agreements that Warren’s plan doesn’t share. ISAs tend to be more expensive than government loans, and, as Warren mentioned in her letter to the Department of Education, they’re largely unregulated. If access to jobs, costs for recent graduates, and the well-being of minority families really matter to her, then she needs a better plan for education.So it’s feasible that an ill-intentioned funder could encourage an unsuspecting student into an agreement they may have trouble paying back. But these drawbacks affect only some students—those who don’t qualify for government loans and those who somehow agree to bad financing terms. Warren’s plan, meanwhile, promises inescapable costs for everyone.

Before tossing income-share agreements, Warren had better take a look at her own policies. If access to jobs, costs for recent graduates, and the well-being of minority families really matter to her, then her plan for education financing needs a whole lot of help.

Further Reading

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