The Student-Loan Payment Pause Led Borrowers to Take on More Debt
In 2020 payments on student loans were paused, initially for 3 months but then extended via executive action until June 30, 2023. This was a big program, at the time there were approximately 45 million student loan borrowers, with an outstanding balance of over $1.7 trillion. The main results of the program were that borrowers used the pause to take on more debt. From a new paper by Dinerstein, Yannelis and Chen:
We evaluate the effects of the 2020 student debt moratorium that paused payments for student loan borrowers. Using administrative credit panel data, we show that the payment pause led to a sharp drop in student loan payments and delinquencies for borrowers subject to the debt moratorium, as well as an increase in credit scores. We find a large stimulus effect, as borrowers substitute increased private debt for paused public debt. Comparing borrowers whose loans were frozen with borrowers whose loans were not frozen due to differences in whether the government owned the loans, we show that borrowers used the new liquidity to increase borrowing on credit cards, mortgages, and auto loans rather than avoid delinquencies. The effects are concentrated among borrowers without prior delinquencies, who saw no change in credit scores, and we see little effects following student loan forgiveness announcements. The results highlight an important complementarity between liquidity and credit, as liquidity increases the demand for credit even as the supply of credit is fixed.
This is good news for debt pauses as stimulus payments but it’s bad news if you think that debt pauses are just the nudge some people need to get their financial house in order. Although the COVID scenario makes generalization somewhat difficult, the story is consistent with borrowers who have difficulty restraining spending regardless of wealth, the so-called wealthy hand to mouth consumers (see here for a now classic example). For this group, a debt pause is just a debt pause.