Free College and the Debt-free Fantasy
American Enterprise Institute
June 10, 2020
Key Points
- Federal proposals to offer free tuition at public universities and community colleges are likely to reduce total student debt by only 15 percent.
- Most student debt finances expenses other than tuition at public institutions, such as living costs, enrollment at private institutions, and graduate degrees.
- At four-year institutions, students eligible for free college who currently borrow are likely to reduce their average annual borrowing from $8,000 to $3,400.
Introduction
At the end of 2019, 43 million Americans owed over $1.5 trillion in federal student loans.1 The rapid increase in these balances over the past decade has led many to deem student debt a “crisis.” Now, there is growing support among Democratic policymakers, and even some Republicans, to immediately cancel all or most of the federal government’s loan portfolio.
Often, these advocates also propose making public colleges and universities tuition free, since student debt cancellation would affect only existing borrowers. Otherwise, students would continue to take out new loans to finance their education going forward. Indeed, the Congressional Budget Office projects that the federal government will issue over $1.2 trillion in new student debt over the coming decade. The combination of debt cancellation and free tuition at public colleges is supposed to end the student loan “crisis” once and for all.
Sen. Elizabeth Warren (D-MA), one of the most prominent advocates of this two-pronged approach, writes:
Once we’ve cleared out the debt that’s holding down an entire generation of Americans, we must ensure that we never have another student debt crisis again. We can do that by recognizing that a public college education is like a public K–12 education—a basic public good that should be available to everyone with free tuition and zero debt at graduation.2
Similarly, Sen. Bernie Sanders (D-VT) believes that canceling existing student debt and making public colleges tuition free will “make college debt-free for all.”3 He writes: “It is time to end the absurdity of sentencing an entire generation—the millennial generation—to a lifetime of debt for the ‘crime’ of doing the right thing: getting a college education.”4
Although presumptive Democratic presidential nominee Joe Biden was slower to embrace free-tuition policies, he eventually endorsed Sanders’ original proposal to make all public universities tuition free for students from families with incomes below $125,000.5 Biden has also rolled out a student loan forgiveness plan that would forgive a minimum of $10,000 per borrower, with additional relief for students who attended public universities or minority-serving institutions to “align [his] student debt relief proposal with [his] forward-looking college tuition proposal.”6
Despite these claims, making colleges and universities tuition free would have only a limited effect on student borrowing. Our analysis suggests that the majority of student borrowing today would continue under the free-college proposals. Even after the government forgives nearly all outstanding debt, total balances will quickly reach levels that Sens. Warren, Sanders, and many others have deemed a crisis. In short, the proposals fall far short of guaranteeing that students will graduate debt-free as proponents claim, at least absent other large increases in grant aid.
This is because free-college policies do not target the largest sources of student borrowing. Many students borrow to attend private undergraduate institutions and graduate schools, which are excluded under free-college proposals. Moreover, many students attend out-of-state public universities and are not eligible for free-college policies under the most prominent proposals. All these ineligible students may continue to borrow through the federal loan program.
Even among those eligible for free college, many students borrow to cover non-tuition expenses such as housing, food, and textbooks while enrolled (hereafter referred to as “living expenses”). The free-college plans cover tuition only, which means that much of the borrowing for living expenses will continue, even if tuition is free and the federal Pell Grant is repurposed to cover living expenses, as many free-college policies propose.
After taking these factors into account, our analysis suggests that a federal free-college matching grant for states such as that proposed by Sens. Sanders and Warren (and endorsed by Vice President Biden) would reduce new student loan volume over the next decade by just 15 percent. Therefore, we expect that the federal government will issue $1 trillion in new student loans over the coming decade even if every state enacts and fully adopts free-college proposals. This implies that even if the current stock of outstanding student debt is forgiven and public colleges and universities are free for in-state students, the federal student loan portfolio will return to so-called “crisis” levels within a couple decades.
Notes
- Federal Student Aid, “Federal Student Loan Portfolio,” https://studentaid.gov/data-center/student/portfolio.
- Elizabeth Warren, “I’m Calling for Something Truly Transformational: Universal Free Public College and Cancellation of Student Loan Debt,” Medium, April 22, 2019, https://medium.com/@teamwarren/im-calling-for-something-truly-transformational-universal-free-public-college-and-cancellation-of-a246cd0f910f.
- Bernie Sanders, “College for All and Cancel All Student Debt,” Friends of Bernie Sanders, https://berniesanders.com/issues/free-college-cancel-debt/.
- Bernie Sanders, “Bernie Sanders: America Is Drowning in Student Debt. Here’s My Plan to End It,” Fortune, July 9, 2019, https://fortune.com/2019/07/09/bernie-sanders-cancel-student-debt/.
- Joe Biden, “The Biden Plan for Education Beyond High School,” Joe Biden for President, https://joebiden.com/beyondhs/.
- Joe Biden, “Joe Biden Outlines New Steps to Ease Economic Burden on Working People,” Medium, April 9, 2020, https://medium.com/@JoeBiden/joe-biden-outlines-new-steps-to-ease-economic-burden-on-working-people-e3e121037322.