The COVID-19 pandemic is wreaking financial havoc on millions of student loan borrowers. Debt cancellation is the best way to protect them now and ensure that they recover along with the economy.
Our work has taught us that low-income borrowers and borrowers of color were already struggling with unaffordable student debt and default before getting hit hard by the economic impact of the pandemic. Black students borrow at higher rates due to racial inequities in incomes and wealth. Black and Latinx borrowers default at twice the rate of white borrowers on their student debt. Our collective response to the present crisis must account for these facts. Loan cancellation is the real, lasting relief lawmakers must deliver for student loan borrowers.
Low-income people and vulnerable communities need to know that they will be protected as much as possible from the economic fall-out of this crisis. That means not only protecting them against involuntary collection activity and unaffordable payments now, but providing relief from historically high debt burdens as they dig out in the months ahead. If the threat of draconian consequences of missing student loan payments forces student loan borrowers to keep working when they are ill, the virus will spread even more rapidly. For borrowers who are sick, many will face unanticipated and unaffordable medical bills.
A contracting economy leads to fear and uncertainty even for borrowers who are healthy. According to the National Employment Law Project, African Americans, Latinos, and women make up a disproportionate number of workers making below $15 an hour. Low- wage workers are not only the most likely to work jobs that increase their risk of contracting COVID-19, but reports of widespread layoffs and furloughs are concentrated in retail, food service, and accommodations jobs. For all of these reasons, we must act quickly to alleviate known economic pressures on student loan borrowers.
Student loan borrowers should absolutely be relieved of making their monthly payments during this time. However, a temporary hiatus from making payments, though necessary, is insufficient. Struggling borrowers still burdened with historically high student loan debt will face a potentially devastated economy when they start making payments again. Their student loan payments will likely prevent them from recovering and contributing to rebuilding our economy.
Debt cancellation is necessary to ensure that balances go down so borrowers can make ends meet now and then recover along with the economy. Policymakers should cancel monthly student loan payments and authorize the U.S. Department of Education to make payments on behalf of federal student loan borrowers. An October 2019 analysis by the Center for Responsible Lending (CRL) found that “[s]tudent debt is a significant drag on the entire economy as it depresses the purchasing power of millions, preventing people from starting families, investing in their own businesses, going back to school, and buying homes.”
Current proposals for cancelling debt have been crafted with an eye toward equity. If implemented, these debt cancellation plans would not provide greater relief to high earning and high balance borrowers whose loans are in good standing than to those who are either not making monthly payments or making small payments due to their low incomes. Ensuring a minimum amount of debt cancellation is an elegant and targeted solution to provide equitable relief to low-income and distressed borrowers. Estimates suggest that almost 90% of student loan borrowers in default are Pell Grant recipients and have relatively low balances. A modest amount of debt cancellation would provide many of them with complete relief from their unaffordable debt burdens.
The more debt cancelled, the better off vulnerable student loan borrowers will be and the more they will be able to participate fully in our economy. CRL’s research further found that “[w]idespread student loan cancellation has the potential to alter the financial life courses of millions of Americans. Reducing or eliminating student loan balances could expand consumers’ access to important financial products such as mortgages and could jump-start consumer spending and family formation for student loan borrowers who are relieved of a significant monthly expense.”
Equity requires widespread debt cancellation.
Are you a student loan borrower impacted by the COVID-19 pandemic? Share your story and let us know what would help you during this time.