By Anastasia C. Wilson, Data for Progress
To get through this crisis, we need more than just stimulus checks to households—we need consumer debt forgiveness for a real stimulus and recovery. As the chant from Occupy Wall Street went: “We got sold out, banks got bailed out.”
The Trump administration continues to insist on a recovery focused on bailing out large corporations and other businesses, while workers bearing the brunt of the crisis are faced with relying on a small, one-time stimulus to make ends meet, and to pay their debts.
But if the economy is in crisis, why not just cancel or forgive these debts instead of siphoning off of stimulus checks?
Despite some deleveraging after the financial crisis of 2007–08 and during the Great Recession, Americans remain highly indebted. The most recent report from the Federal Reserve Bank of New York (hereafter: “NY Fed”) shows that household debt levels have grown to beyond that of their pre-recession peak, with a total of $14.15 trillion in outstanding household debt; the majority of this is mortgage debt, but the figure also includes student debt, auto loans, credit cards, and other household debts. While some of the growth in debt is due to favorable conditions like low interest rates for home mortgages, some forms of debt remain concerning: student debt, auto loans, and credit card debt.
Student-loan debt has continued to grow, reaching yet another new high of $1.7 trillion outstanding. While the Trump administration has temporarily suspended interest accrual and payments during the pandemic, these actions merely put off borrowers’ payments and interest until September, and do not apply to private student loans. As the Student Borrower Protection Center notes: About $303 billion in student loans will not be covered by the stimulus, consisting of private loans, Perkins loans, and privately owned loans through the Federal Family Education Loan Program. Further, the burden remains on borrowers who are required to contact their student-loan servicer.
Before the pandemic broke, the NY Fed’s report on household debt for the fourth quarter of 2019 showed student-loan debt outpacing other forms of debt for defaults and delinquency, noting that “11.1% of aggregate student debt was 90+ days delinquent or in default in 2019Q4. The transition rate into 90+ delinquency was 9.2%.” Student debt was already experiencing a steady and ongoing growth in default and delinquency rates, even in a “good” economic climate.
While the Coronavirus Aid, Relief, and Economic Security Act offered some relief, do we trust this to be carried out properly? With many reports on the failing of the Besty DeVos–led Department of Education to address issues in student-loan servicing and repayment programs, it makes sense that many borrowers remain concerned about how loan suspension will actually be administered. Individuals who are recently unemployed but who had previously been making qualifying payments for a loan-forgiveness program may also be concerned about their potential forgiveness plan being lost alongside their jobs, as unemployment disrupts the qualifying payments and employment for those in the nonprofit sector. Regardless of temporary payment suspension, student-debt balances will still loom over many workers as we enter a depressed and uncertain economic future.
A better approach? Cancel student debt.
Research already shows that student-loan forgiveness stimulates economic growth. A 2018 report from the Levy Institute notes: “The policy of debt cancellation could boost real GDP by an average of $86 billion to $108 billion per year. Over the 10-year forecast, the policy generates between $861 billion and $1,083 billion in real GDP (2016 dollars).” On the brink of a full-blown depression, the stimulus provided by student-debt cancellation would be a welcome boost.
Furthermore, we know that student debt is responsible for maintaining and even exacerbating economic inequalities by race and ethnicity as well as gender. As a report from the Roosevelt Institute, along with Demos and the Century Foundation, notes: Student debt reinforces the racial wealth divide. And researchers like Louise Seamster trace how marginalized groups have been sold debt as opportunity, leading to reinforced and exacerbated centuries of inequality. Cancelling student debt would help close that gap, and would be especially important in an economic downturn likely to deepen these inequalities. In a crisis where unemployment rates of 20 to 30 percent are anticipated, cancelling student debt is one way to make sure inequality doesn’t become even more entrenched than it already is.
Even before this crisis came on, rising late payments and defaults in auto loans had some economists concerned. The number of auto loans, especially subprime auto loans, has been increasing since roughly 2012, mostly reflecting an increase in auto sales overall. But within this is an increase in subprime auto lending, and to rising rates of late payment and defaults on these loans. Of the $1.3 trillion outstanding in auto-loan debt, about $62 billion is over ninety days delinquent as of the third quarter of 2019—a number that has been steadily increasing since 2015. The Financial Times reported “yield-crazed investors shrugging off” the apparent concerns about the subprime auto-loan market and rising delinquencies—and this is all before COVID-19 emerged. Marketwatch reported that the average monthly payment on a subprime auto loan was $594, which is nearly half of the Trump stimulus check for an individual. A stimulus check to auto-loan payments doesn’t prop up small businesses or stimulate a recovery.
While some automakers and lenders are reportedly allowing for temporary suspension of payments during the pandemic, this just pushes the problem out a few months, into our even more uncertain future. We should offer forgiveness and low-interest refinancing options now, to ward off an even worse economic crisis.
Credit Card Debt
Like auto loans, credit card balances have also experienced new highs in the past year. The NY Fed’s fourth-quarter Household Debt and Credit Report shows a slight uptick in credit card debt and an overall growth in credit card accounts since the Great Recession, with a slight uptick in the most recent quarter. The report shows that a big age group—credit card borrowers between the ages of eighteen and twenty-nine—have been experiencing an uptick in delinquency rates. From the recent US Federal Reserve survey on the Economic Well-Being of Households, we know that in 2018 nearly 40 percent of households still would not have $400 to cover an emergency, which likely translates to an increase in credit card debt while the COVID-19 pandemic continues to reduce earnings through layoffs and work reductions. Americans suffering from the fallout of the pandemic shouldn’t have to be reliant on credit card debt, and those debts should be forgiven or modified at low or zero interest rates.
Forgiveness and Cancellation, or Bust
Meanwhile, as workers scramble to make ends meet in the wake of a crisis, the Intercept has reported that the debt-collection agencies have lobbied hard to be included as “essential businesses” to remain open during the pandemic.
Temporary suspension of payments just pushes back the problem—and, given the emerging scale of this crisis, most likely pushes it back into an even more unfavorable economic climate. The economy will be markedly changed after this crisis, and going back to the status quo will only drag out the slump.
As many have argued, we will need much more than a one-time stimulus to get out of this crisis, and probably multiple rounds of stimulus spending. Alongside increasing protections and benefits to workers, offering aid to states and municipalities, investment in programs like a Green New Deal, moratoriums on rent and mortgages (or Housing Guarantee), Medicare for All, and offering additional cash stimulus payments, we need cancellation and forgiveness of consumer debts that drag on the economy. Let’s stimulate the economy for workers, not for big finance and debt collectors.
Anastasia C. Wilson (@anastasiawils) is a PhD student of economics at the University of Massachusetts at Amherst. In the fall of 2020, she will join the Economics Department at Hobart and William Smith Colleges as an Assistant Professor.