Get Snowball Wealth on your iPhone Download
  • Blog
  • How Would Student Debt Cancellation Work?

How Would Student Debt Cancellation Work?

With the presidential elections approaching, candidates have started to voice their proposals around a myriad of topics. This election season, student debt is a hot topic, and front-runner candidates like Elizabeth Warren and Bernie Sanders have taken a strong stand against student debt. Senator Elizabeth Warren and Senator Bernie Sanders have introduced two plans to tackle student debt in the US. The two plans agree on canceling some or all of student debt but they differ on how it gets done.

We will break down both plans:


Elizabeth Warren:

Massachusetts Senator Elizabeth Warren plans to forgive student debt on a tiered plan based on household income. Borrowers earning less than $100,000 would be forgiven the maximum cap of $50,000. Borrowers earning between $100,000 and $250,000 would be forgiven a reduced benefit of $1 for every $3 above the mark. And borrowers earning more than $250,000 would not be eligible for forgiveness on their student loan balance.

Warren’s plan would not erase all the debt but would clear $640 billion. This would help forgive the entire debt of more than 75% of borrowers, and the partial debt of more than 95% of borrowers.

Sen. Warren plans to pay for her program with her proposed ultra-millionaire’s tax, which is a 2% annual wealth tax on families whose net worth exceeds $50 million, and an additional 1% on families that are worth over $1 billion. This tax would affect 75,000 families in the US and collect $2.75 trillion over 10 years.

“The student debt crisis is real and it’s crushing millions of people – especially people of color,” commented Warren in a statement.

Warren has explained that even though the entire student debt balance under this forgiveness plan would not be paid off, it would help close the wealth gap in the US and allow for a first step towards starting a business and/or homeownership for a lot of people. “The student debt crisis is real and it’s crushing millions of people – especially people of color,” Warren said. In addition to eliminating a big piece of the total student debt balance, the plan will introduce free tuition for both 4-year and 2-year public colleges.

Bernie Sanders:

Vermont senator Bernie Sanders has a different approach towards student debt forgiveness, he plans to cancel all $1.6 trillion of it. Under Sander’s plans there would be no income or means testing, it would just erase all student debt. Additionally, it would make public four-year colleges and universities and free for all. This means that students, regardless of income, would also be able to attend a higher education institution.

Sen. Sanders would not tax the wealthy but would rather tax stock market trades. He proposes a 0.5% tax on stock transactions, as well as a smaller 0.1% tax on bond trades, and a 0.005% tax on derivatives transactions. The Sanders office has claimed this would generate around $2.2 trillion over 10 years.

Which proposal is better?

Other candidates in the Democratic primary have proposed more modest plans, but Warren and Sanders are the ones that have the most ambitious plans.

One aspect to take into account is how both programs will be funded, Warren’s plan would affect only a very small number of people (a good thing) while Sanders’ plan would affect anyone with an investment account - including retirement such as 401(k).

Warren has a tiered approach, where Sanders has a plan that is both more expansive and more expensive. Some think that Warren’s plan is a little more doable. Other think that Sanders’ plan has less administrative overhead. Both plans would require a large administrative lift to execute.

In the end both plans agree on forgiving student debt and making public college absolutely free for everyone. Alleviating the debt of 45 million Americans would help close the wealth gap and provide access to higher education.

Honestly, if either plan gets passed it would be HUGE for most Americans.

What would it take for this to get passed?

In order for either proposal to go into effect there are a number of events that need to happen before. First of all, the candidates would have to win. Assuming either candidate wins, this does not guarantee the proposal will go into effect. The bill would have to pass the Senate and the House, which is no easy task given the divide between Democrats and Republicans. Additionally, it may be possible that the proposed plans be redrafted with minor or major changes in order for it to pass.

Finally, it’s important to recognize that even when these bills are passed, there are usually steps to take to make sure you take advantage of the programs. Remember the debt forgiveness program for teachers and public service? Well, 99% of the people who applied for the debt forgiveness program were rejected. From May 2018-2019, only actually 661 people received student loan forgiveness (over 50K applied). This is less than 4% of the $700 million that Congress allocated for this expanded program.

Worried About Refinancing?

For both plans, in their ideal scenario, the forgiveness will be treated the same for all debt— not just federal loans — so refinancing won’t hurt borrowers.

But, things don’t always go according to plan and politicians often have to compromise. No one knows if any forgiveness proposal will ever become reality or what a compromise might look like.

One thing we know for sure is that there isn’t any harm in refinancing existing private student loans. This doesn’t change anything from the government’s perspective, and borrowers are able to get lower interest rates.

Curious about what we are building at Snowball Wealth? Apply to be a part of our completely free beta here:

Related categories

Sign up for our newsletter for monthly financial tips!