Could Crypto Markets Rally As Midterms Bring Student Debt Forgiveness?

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

The new plan echoes calls from Sen. Elizabeth Warren (D-MA) leading up to the 2020 election when she and Bernie Sanders (I-VT) proposed to forgive $1.6 trillion in student loan debt. The plan has raised concerns about the debt burden it would place on the US government and whether increased disposable income would help economic growth or be channeled into non-essential spending like cryptocurrencies. .

Although the pandemic has wreaked havoc on the economy, it has shed light on consumer spending habits.

As governments around the world rushed to put in place relief programs during the pandemic, many opted to invest their stimulus checks in cryptocurrencies, driving up the prices of the two biggest cryptocurrencies, bitcoin and Ethereum, to all-time highs in November last year.

Can we expect a similar rally in the crypto markets with a new macro factor entering the fray? Let’s 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-part student loan forgiveness plan.

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

Second, certain low-income people will be exempted from payments and the maximum repayment of undergraduate loans will be capped at 5% of an individual’s income. These would reduce annual reimbursements by $1,400 for a construction worker earning $38,000, $1,700 for a single public school teacher earning $44,000 a year and $2,800 for a nurse with two children. earning $77,000 a year.

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

The bull case for crypto

What does all this mean? Savings on student debt are unlikely to introduce inflationary pressures on the U.S. economy the way pandemic-era stimulus checks did. The savings will likely result in a trickle of cash available in vulnerable households, where it could be used to stimulate the economy through mortgage down payments and new businesses.

But there is a bull case to be made for crypto. Loan cancellation plans risk undermining constitutionally guaranteed contracts between private parties, 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, the recent purchase of crypto exchange Archax by UK investment group Abrn, and the launch of a crypto-related exchange-traded fund by Charles Schwab.

Hedge fund billionaire and former White House communications director Anthony Scaramucci said that SkyBridge Capital, the company he runs, did not abandon any of its positions during the recent crypto market downturn.

Measures like these could give credence to the digital asset industry, reduce perceived risk for the retail investor, and encourage investment in crypto.

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