As Democrats weigh in on student loan forgiveness, will credit card debtors stay in the cold?
In November, President-elect Joe Biden approved legislation that would make monthly Payments borrowers in difficulty with private student loan debt, and he previously has expressed support for a rebate of up to $ 10,000 for borrowers with federal student loans. A number of Democrats, including Senate Minority Leader Chuck Schumer (NY), Senator Elizabeth Warren (MA) and Representative James Clyburn (SC), have called on Biden to go further, asking him to cancel until to $ 50,000 in federal student loan debt. per borrower.
With 10.7 million Americans unemployed, the COVID economic crisis has made student loan sorry an urgent rallying cry for the left. Millennials have been hit hard by the Great Recession and the COVID crisis: during the Great Recession, states increased dramatically tuition fees for public universities, and millennials only have A quarter of household wealth that baby boomers held at the same age.
While most forms of economic stimulus would require Congress to pass legislation, when Congress passed the Higher Education Act 1965, they gave the executive the power to write off student debt. Senate control will be decided in January, based on the outcome of the two second round of senatorial elections: If a Republican-controlled Senate and Democrat-controlled House fail to agree on a stimulus package, canceling student loans could be one of Biden’s only options to provide relief to struggling families . A number of provisions of the CARES Act are ready to expire in December.
Why is debt forgiveness a good incentive?
In past economic crises, congressional stimulus plans have focused on cash payments or tax cuts for American families, aid to state and local governments, and job-creating infrastructure projects. .
But in an influential 2014 book, Home Debt: How They (And You) Caused The Great Recession And How We Can Prevent It From Happening Again, economists Atif Mian and Amir Sufi explained that targeting relief on the most indebted households is a good way to revive a struggling economy. Mian and Sufi found that during the Great Recession, cities with heavily indebted residents suffered large job losses, especially in businesses that depend on local demand, such as restaurants and car dealerships. At first, cities with less indebted residents fared better, but as Mian and Sufi explained, eventually economic desperation swept across the country. In other words? When families in debt struggle, everyone struggles.
Because households with high debt have a marginal propensity to spend 60% more than low-debt households, a stimulus dollar given to a household in debt goes further than a stimulus dollar given to a household without debt. Economists to have find only that phenomenon holds, even after accounting for differences in income.
Many forms of federal assistance to families in need, such as the Working Income Tax Credit, rely primarily or exclusively on income rather than debt or wealth. But many moderate-income families still struggle to pay off high debts that push them into poverty, especially in the years after facing hardships such as job loss, a medical emergency, or the death of a family member.
Sharing aid on the sole basis of income, regardless of debt or net worth, ignores the fact that due to centuries of racism discrimination, the wealth gap between black and white families is about five times bigger than the income gap. A 2016 report by the NAACP found that Latin Americans and Black Americans are more likely than White Americans to report turning to a credit card “to pay for basic living expenses, such as rent, mortgage payments, races, utilities and [they] had no money [their] check or savings account. The report also found that black borrowers pay interest rates on credit cards that are, on average, about 2 percentage points higher than white borrowers.
Credit cards and student loans, compared
According to The data According to the Federal Reserve’s 2018 Survey of Household Economics and Decision-Making, among the American adult population, 43% have interest-bearing credit card debt, 38% pay their bills in full credit card and 18% do not have a credit card.
At all levels of the income distribution, Americans are more likely to have interest-bearing credit card debt than they are on a student loan. Although credit card debt is more common than student loan debt, the two forms of debt have similar income distributions, skewed in favor of the middle class and far removed from those with the lowest and lowest incomes. higher.
Americans who did not attend college, or who attended college but did not graduate, are much more likely to have credit card debt than student loan debt .
Although there is some overlap between the two populations, most student loan borrowers do not have credit card debt, and most credit card borrowers do not have student loan debt. .
Put credit card debtors in the fold
Until 1986, most forms of interest on loans were tax deductible, including interest on credit cards and interest on auto loans. The reintroduction of this tax deduction could help some families in difficulty. However, as Congress increased the standard deduction in 2017, only a small proportion of households now detail their tax returns: the Tax foundation estimated that the 2017 tax law reduced the proportion of taxpayers who detail their returns from 31% to 14%.
Congress could also require credit card companies to offer more generous forbearance programs. Among the big banks, the Goldman Sachs
When credit card debt gets really unmanageable, the end result is often a debt collection lawsuit. These lawsuits allow credit card companies or third-party debt buyers to seize wages and bank accounts, and can even put borrowers behind bars. Laws governing debt collection lawsuits vary from state to state, but nationally, debtors have little protection against credit card companies seeking to garnish wages and assets, even when the end result is food insecurity or homelessness. Debt collection lawsuits were suspended in most parts of the country during the first months of the pandemic, but major lenders and debt collection companies largely resumed debt collection lawsuits from the provinces. pre-crisis levels. Pass the Pay Equity and Garnishment Act would ensure that credit card companies cannot resort to lawsuits to push families into extreme conditions.