Covid-19 will reshape US student debt more than Biden
US president-elect Joe Biden’s student debt relief plan is a dialled down version of what Democratic candidates were proposing on the campaign trail in the run up to the 2020 election. But rather than focus on the incoming president’s priorities, observers should be thinking about the lasting impact of the Covid-19 pandemic on the $1.6tr of outstanding student debt.
Biden has said that he is open to cancelling $10,000 of student debt per borrower as part of a coronavirus relief plan, potentially by executive order rather than in collaboration with Congress. He has also proposed cancelling undergraduate debt for students who attended public or historically black colleges.
The president-elect’s approach is less radical than Elizabeth Warren's or Bernie Sanders’, who each proposed much more sweeping debt forgiveness plans. It is also likely the start of a new conversation around student debt as the latest in a two decades-long series of crises plunges millions of Americans into another recession.
Battered by war, economic collapse, political turmoil and, finally, a viral pandemic, the US in first 20 years of the century has seen populist ideas once scoffed at enter the mainstream. Beginning as a fringe concept in the days of Occupy Wall Street following the 2008 crash, the idea of cancelling student loans has gained support in the face of skyrocketing debt in the decade that followed.
But the Covid-19 crisis has been another inflection point for the American prosperity gap and will likely direct the course of student debt policy far more than the ideological leanings of whoever happens to occupy the White House.
Job losses have been pared, but there are still 10m fewer people employed than there were in February. There is growing concern that some of these losses will be permanent as US companies retrench following a historic downturn.
With the Federal Reserve rapidly depleting its ammunition to stave off recession and a toxic situation in the Capitol casting doubt on a new aid package, student debt forgiveness could be a stand-in for new stimulus for 45m borrowers and the country as a whole. The idea is backed by economists as well. In 2018, a report authored by four economists stated that a “policy of debt cancellation could boost real GDP by an average of $86bn-$108bn per year”, and that “the inflationary effects of cancelling the debt are macroeconomically insignificant”.
Even a conservative Trump administration has flirted with the idea of loan forgiveness. While Trump has stopped short of supporting outright cancellation of debts, he has halted federal student loan payments through the end of the year in response to Covid-19, proposed streamlining all income-based repayment plans for borrowers and lowering the maximum payment term for undergrad loans from 20 to 15 years.