Can Crypto Markets Rally as Midterms Bring Student Debt Forgiveness?

With the US midterms on the horizon, politicians including Joe Biden are targeting younger voters through a recently announced student loan debt forgiveness plan that could free up money for crypto investments.

The new plan echoes Sen. Elizabeth Warren’s (D-MA) calls leading up to the 2020 election when she and Bernie Sanders (I-VT) offered to forgive $1.6 trillion in student loan debt. This plan raised concerns about the debt burden it would place on the US government and whether the increased disposable income would contribute to economic growth or be allocated to non-essential spending such as cryptocurrencies.

While the pandemic took a financial toll, it brought spending habits into sharp focus.

As governments globally scrambled to put together relief packages during the pandemic, many chose to invest their stimulus checks in cryptocurrencies, driving the prices of the two biggest cryptocurrencies, bitcoin and Ethereum, to all-time highs last November.

Can we expect a similar rally in crypto markets with a new macro factor entering the fray? Let us see.

Three-part plan

On August 24, 2022, the White House released a fact sheet announcing President Joe Biden’s latest midterm play—a three-pronged plan for student loan forgiveness.

First, under the new plan, the Education Department will provide up to $20,000 in debt relief to recipients of the Pell Grant, a financial aid program. Non-Pell Grant recipients can receive up to $10,000. To qualify for the relief, individual income must not exceed $125,000 a year or $250,000 a year for married couples. There will also be a pause in repayment of student loans until 31 December 2022.

Second, specific low-income individuals will be exempt from payments, and the maximum repayment for bachelor’s loans will be limited to 5% of an individual’s income. These would reduce annual repayments by $1,400 for a construction worker making $38,000, $1,700 for a single public school teacher making $44,000 a year, and $2,800 for a nurse with two children making $77,000 a year.

Those who have served in the military or government will also be credited.

The bullpen for crypto

What does all this mean? Savings from student loan debt is unlikely to introduce inflationary pressures on the US economy the way stimulus checks from the pandemic did. Savings are likely to result in a trickle of disposable cash into vulnerable households, where it can be used to boost the economy through property down payments and new businesses.

But it’s a bull case to make for crypto. Loan forgiveness plans risk jeopardizing constitutionally guaranteed contracts between private parties, and setting a precedent that renders them ineffective for future agreements. This can be a tough pill to swallow, especially for traditional financial institutions.

Institutional interest is growing with Coinbase’s recent partnership with BlackRock, British investment group Abrdn’s recent purchase of crypto exchange Archax, and the launch of a crypto-linked exchange-traded fund by Charles Schwab.

Billionaire hedge fund and former White House communications director Anthony Scaramucci said SkyBridge Capital, the firm he heads, did not abandon any of its positions during the recent downturn in the crypto market.

Moves like these could give the digital asset sector credibility, reduce perceived risk for the retail investor and encourage crypto investment.

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