How the Covid-19 Pandemic Has Impacted Student Loan Debt

Background 

College education in the US has always been costly and problematic, and the student debt issue only catalyses the distress. The problem of soaring student loan debts cuts across the economy since the rapid accumulations affect more than just the loaners. At the estimated collective total of USD 1.6 trillion as of 2020, student loan debt exceeds both credit card and car loan debt (Johnson, 2020). Not surprisingly, student debt has been mounting exponentially alongside tuition fees. When the cost of a four-year college degree jetted up by 25% due to increased demand after the 2008 recession, student debt skyrocketed by 107% (Hess, 2020). Precisely, the growing impacts of student debt on economic parameters like homeownership and unemployment rates drive the concern to quickly address the problem. All this, viewed against a coronavirus-punctuated background, required a calculated move to avert a looming economic impasse caused by the loans. 

Why Student Debt Matters 

Dwindling payment prospects with the novel coronavirus 

While for a long time, the student debt problem has managed to disguise even after being labelled a crisis, the coronavirus crisis is making the situation much more conspicuous. In June, 42.6 million Americans filed for unemployment after the country entered an economic recession three months before (Hess, 2020), courtesy of the coronavirus pandemic. The World Economic forum rightly observes that 55% of them are recent graduates, with an estimated median loan of USD 35,625 (Berkeley & Letzing, 2019). Given the uncertain economic prospect because of the never-ending virus, these Americans may never offset even half of the loan by 2022. 

It affects all sectors of the economy 

Student loan debt matters because it cuts across the economy, and simple statistical intuition reveals that it critically lags development in the housing and real estate, health, and financial sectors. Student loan debt affects mortgage in diverse ways. As loan debt rises, homeownership falls, and the trend excites a ripple effect throughout the economy. As a matter of fact, the National Association of Realtors recently revealed that 36% of college graduates aged between 21 and 35 blame on the student debt for failure to purchase a house (Nova, 2020). On the same account, 21% had delayed marriages, and 26% delayed starting families. With the coronavirus pandemic affecting individuals, institutions and families alike, these figures are likely to worsen. 

Implicates health and productivity 

The debt numbers matter because they affect the health of the young American generation. A University of South Carolina study reported that six out of ten college graduates with a median debt of USD 25,000 and above “perceived more stress, had more symptoms of depression, anxiety, and ill-health” (White, 2015). The situation is very much likely to escalate when the emotional and financial strain due to the novel coronavirus is factored, necessitating immediacy in providing relief to debtors. 

Escalating uncontrollably 

Student loan debt matters because it is rapidly growing and might easily slip out of hand. Between the great depression and right before the coronavirus pandemic, the debt had registered a growth rate of 6% annually, with a record-high average student loan balance of USD 35,359 in 2018 (World Economic Forum, 2019). However, with the pandemic, the Harvard Business Review project that the annual growth rate will jump to 7% and the sum at USD 2 trillion, and an estimated USD 3 trillion at the end of the decade (Johnson, 2019). That said, there is a need to arbitrate, lest the high education financing system loses credibility. 

Inadequate data means more potential implication 

Lastly, most analyses of the student loan problem rarely capture the data of students who dropped out of school and yet had running loans. Data from the Department of Education indicate that the majority defaulters are indebted to federal and private academic lending institutions to a tune of USD 15,000 on average, indicating that their numbers also significantly contribute to the crisis (Whistle, 2019). Essentially, the challenge of creditworthiness is more severe with college dropouts. In its 2019 annual report, the Institute for College Access and Success noted an 11.5% delinquency rate for college graduates for up to five years (Friedman, 2020). Not surprisingly, the report further estimated that college dropouts had twice the defaulting rate and collectively owed lending institutions slightly above USD 400 billion. That means that students who failed to complete school carry almost double the financial burden for the economy. That is partly because income-based repayment plans are the popular option. Thus unemployed dropouts certainly intensify the debt’s growth rate since they are much less likely to pay the loans due to unemployment. 

Trump’s waiver is ineffective 

While many believe that President Donald Trump’s move to waiver federal student loans to cushion them from the pandemic was a probable solution, expert advice maintains that the outcomes are negligible. Lieber (2020) observes that what Trump’s waiver meant was that monthly payments would not go down at all. Instead, the payments would be channelled towards paying the principal amount. In essence, the enactment was offered a short-term relief, but would not sustain the financial strain, compounded by the coronavirus. 

The Proposed Solution 

A realistic solution to the student loan debt problem must recognize the diversity of the problem, which should recognize the root cause – the high cost of university education in the first place. In fact, the rising cost of tertiary education has, for the past half-century, significantly contributes to inflation and widening economic and social disparities. The solution also recognizes the unique problems the coronavirus pandemic poses to the debtors. This paper suggests a comprehensive and inclusive solution – to institute a raft of measures that will ensure the following: 

Limit tuition charges at government colleges and universities and institute regulations to mirror private institutions’ changes, thus curbing the rising need for student funding. 

Increase grants to low-income students, as well as facilitating well-evaluated waivers on tuition. 

Limit higher educational institutions that post poor student outcomes from accessing federal loans to enhance higher prospects of loan recovery. 

Significantly reduce interest on student loans. Contrary to the socio-political majority view, economists estimate that loan cancellation will boost the annual GDP by USD 85 to 108 billion (Roseth, 2019). Furthermore, in cancelling debts, the federal government will have stimulated the economy by improving house balance sheets that hold back economic growth. 

Introduce a package that will directly relieve coronavirus victims- for instance – allowing students who lost their parents to the pandemic to access interest-free loans. 

The solution must also consider adopting an approach that will reduce racial and gender disparities in the student debt crisis. A report by the Annie Casey Foundation made the following observations on the debt: 

African-American borrowers carry the debt 20 years after graduating, compared to Whites, at only 6%. 

Women account for over 60% of the total debtors. 

First-generation students show a 12% likelihood to delay payments, as opposed to non-first generation students who show a 6% likelihood. 

Recommendations 

The most helpful recommendation that could ever be made is to implement Senator Elizabeth Warren’s Student Loan Fairness Act. The Act beholds the following reprieve to the economy, the coronavirus pandemic considered (Friedman, 2020): 

The Act is projected to enable 68% of millennials to have their loan limits with federal institutions tripled, implying that poverty tax will be minimized. 

It will reduce the loan per capita to an estimated USD 3,948 by 2023. 

Increased investment potential by the debtors to an estimated tune of USD 2.1 billion by 2024 in terms of start-ups due to venture capital availability. 

In conclusion, the escalating student loan debt problem is all-encompassing and touches on almost all corners of the economy. That notwithstanding, the coronavirus has made it more difficult for the debtors to make economic progress, given that student loans seriously impact their credibility. In view of that, the two recommendations could help save the situation: Reducing the cost of higher education by all means and implementing Senator Warren’s proposal to waive the debts. All in all, the progress made to remedy the situation so far are ignoble, and the Trump administration ought to hasten on the matter before it gets out of hand. 

References 

Annie Casey Foundation. (2020, April). “Solutions to the Student Debt Crisis in a Time of Economic Distress.” Retrieved September 21 2020 from https://www.aecf.org/blog/solutions-to-the-student-debt-crisis-in-a-time-of-economic-distress/ 

Berkeley, A. & Letzing, J. “America’s Student Debt Crisis Explained.” World Economic Forum. Retrieved September 21 2020 from https://www.weforum.org/agenda/2019/09/us-student-debt-crisis-explained-america-education/ 

Friedman, Z. (2020, February 3). “Student Loan Debt Statistics in 2020: A Record $1.6 Trillion.” Forbes. Retrieved September 21 2020 from https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#79d3a489281f 

Hess, A. (2020, June 12). “How student debt became a $1.6 trillion crisis.” CNBC . Retrieved September 21 2020 from https://www.cnbc.com/2020/06/12/how-student-debt-became-a-1point6-trillion-crisis.html 

Johnson, D. (2019, September). “What Will It Take to Solve the Student Loan Crisis ?” Harvard Business Review . Retrieved September 21 2020 from https://hbr.org/2019/09/what-will-it-take-to-solve-the-student-loan-crisis?registration=success 

Lieber, R. (2020, March 14). “Trump’s Student Loan Interest Waiver Isn’t What You May Think.” New York Times. Retrieved September 21 2020 from https://www.nytimes.com/2020/03/14/business/student-loans-coronavirus-trump.html?searchResultPosition=1 

Nova, A. (2010, January 31). “How to Buy a House Despite Student Debt.” CNBC . Retrieved September 21 2020 from https://www.cnbc.com/2020/01/31/have-student-debt-you-can-still-get-a-mortgage.html 

Roseth, B. (2019, December 13). “Student Debt Crisis and Possible Solutions.” University of Washington Retirement Association. Retrieved September 21 2020 from https://www.washington.edu/uwra/2019/12/13/student-debt-crisis-and-possible-solutions/ 

Whistle, W. (2019, October 3). “A Look at Millennial Student Debt.” Forbes . Retrieved September 21 2020 from https://www.forbes.com/sites/wesleywhistle/2019/10/03/a-look-at-millennial-student-debt/#1ad3a4862437 

White, G. (2015, February). “The Mental and Physical Toll of Student Loans.” The Atlantic. Retrieved September 21 2020 from https://www.theatlantic.com/business/archive/2015/02/the-mental-and-physical-toll-of-student-loans/385032/