Cancel Federal Student Loans to Provide Short and Long-Term Stimulus Amid Pandemic
In response to the COVID-19 pandemic and its devastating economic impact, Americans for Financial Reform calls on Congress and the U.S. Department of Education to use their authority to cancel federal student loan debt. In the short term, the Department should act with urgency to end any offsets of tax refunds and immediately halt wage garnishment for federal student loans. The Department and Congress should also consider making principal and interest payments on outstanding federal student loans.
Even prior to the COVID-19 crisis, federal student loan defaults had increased nearly 14% from federal fiscal year 2018 to 2019. This works out to approximately one default every 26 seconds. Labor shocks like those the pandemic are likely to cause will undoubtedly increase federal student loan defaults. The consequences for borrowers in default on federal student loans are punitive and severe, with tax refunds seized and wages garnished. Cancelling debt would be a powerful and efficient way to immediately relieve pressure on distressed borrowers, boost consumer spending at a time when the economy is contracting, and reduce hardship on people who lose income because of the pandemic and efforts to fight its spread.
Cancelling federal student debt would provide short-term stimulus:
- Instead of wages being garnished for student loans, borrowers would pass the savings right back into the economy by spending to meet day-to-day needs and paying other bills. A Brandeis University report shows that debt cancellation would free up several hundred dollars each month for consumption and investment that is currently going to interest payments.
- Research also shows that federal student debt cancellation increases borrowers income by about $3000 over a three year period.
Cancelling federal student debt also provides long and medium-term benefits:
In the medium-term, canceling student debt can also soften the blow of recession, as student debt cancellation has many stimulative effects.
- The Levy Institute has estimated that student debt cancellation would boost GDP by up to $108 billion a year, and add up to 1.5 million jobs per year, over a ten year period.
- Moody’s Investors Service has said “In the near term, we would expect student loan debt cancellation to yield a tax-cut-like stimulus to economic activity.”
The Secretary of Education has the authority, under the Higher Education Act, to compromise and modify student debt. Student debt cancellation would provide relief for low-income Americans who may otherwise have trouble paying medical or housing bills, and for anyone whose income is affected by the crisis. Cancelling student debt would be a powerful tool to mitigate the impact of the Coronavirus crisis on individuals, families, communities and the broader economy. The government should swiftly take action to use it.