Sen. Elizabeth Warren’s recent proposal to alleviate student debt for tens of millions of Americans isn’t as palatable for credit unions as it is for borrowers.
Warren, who is running for the Democratic nomination for the 2020 presidential election, has released a plan that would affect student loans for over 95% of borrowers.
“It is going to be cumbersome and costly, and I think the biggest thing is that it doesn’t attack the core of the problem which is how unnecessarily expensive higher education has become in our country,” said Jorge Newbery, founder and CEO at DebtCleanse Group Legal Services, which helps consumer pay off debt.
Though credit unions welcome initiatives to help members with student debt, some CUs are concerned with the preliminary details of the proposal and uncertainties in the plan, including what would happen to private student loans.
Under her proposal, Warren, D-Mass., seeks to eliminate up to $50,000 in student debt for households earning $100,000 or less annually. Households with income over that threshold would see their eligibility for assistance gradually decrease.
“A person with household income of $130,000 gets $40,000 in cancellation, while a person with household income of $160,000 gets $30,000 in cancellation,” Warren wrote in her proposal.
Households earning over $250,000 would be ineligible for debt forgiveness. Her plan would also allow states to eliminate tuition from public colleges.
Overall, roughly $1.2 trillion worth of student debt could be eliminated for 42 million Americans.
Some in the credit union community are already nervous about how Warren’s proposal “could have a chilling effect on origination and refinancing of government-backed student loans,” said John McKechnie, a former staffer at the National Credit Union Administration.
There are a number of ways credit unions could be affected. For one, if these credits are paid back prematurely then credit unions and other lenders could lose out on interest income they would have collected over the life of the loan. If state schools no longer charge tuition, then that could diminish the overall need for student loans. The plan could also affect the
“It’s the confusion that it could cause,” said Brian Volkmann, chief financial officer of Affinity Plus Federal Credit Union in St. Paul, Minn., which provides student loans to members. “People could be thinking that $50,000 is just wiped out and that’s where our concern comes in.”
Overall there was $11.6 billion in nonfederal loans, including private loans originated by credit unions, for the 2017-2018 school year, according to data from the College Board. It isn’t clear what would happen to this debt under Warren’s plan.
"Private student loan debt is also eligible for cancellation, and the federal government will work with borrowers and the holders of this debt to provide relief,” Warren wrote in a post about her plan.
There are different options of how the government could deal with private student loans, such as reimbursements to the lenders or providing a tax credit, said Steven Reider, president and CEO of Bancography.
"I think it's a dent [in the industry], not a hole,” Reider said. “[Student lending is] certainly not a primary source of asset growth for the vast majority of institutions, but there's a lot of 2% lines of business out there. If you're a bank or a CU that gets 98% of revenue from 14 product sets, and then there's 10 other product types that give you 1% of your revenues, still if you lose any one of those, that's not insignificant."
Americans now hold roughly $1.6 trillion in student debt, and paying back student loans can sometimes impact a person’s other financial decisions, such as buying a house, so the proposal could have an impact on credit union portfolios well beyond those institutions holding private student loans.
Some are already pushing back against the plan. A report from Adam Looney, a senior fellow in economic studies at the Brookings Institution, labeled Warren's proposal as "regressive, expensive, and full of uncertainties."
Some skeptics also note that wealthier Americans will reap greater benefits from the plan given that high-income households are more likely to have larger student loans than low-income households.
The top income quartile households making $90,000 per year held 47% of outstanding education debt, according to 2013 data from the Federal Reserve. Households in the lowest income quartile making $25,000 per year held 11% of total education debt, according to the data.
Implementing the plan would also be challenging. It would likely face fierce opposition from Republicans in Congress.
An aide for Warren said that the plan would help close the racial wealth gap for African Americans and Hispanic Americans and would “provide total debt cancellation to more than 80% of people in the bottom 60% of income while providing no cancellation to anyone in the top 5% of incomes."
“This is a highly progressive proposal – we’re taxing the fortunes of people with over $50 million in wealth to provide student loan debt cancellation to 42 million lower-income and middle-class Americans,” a Warren aide said in a written statement.
