Student Loan Borrowers Get Deeper in Debt from Pause in Payments

A remarkable new working paper shows the household finances of student loan borrowers have become more burdened by debt during the last three years. Although many have been excused from making payments since 2020, many of these borrowers responded to that relief by taking out other kinds of loans.

Here’s what the University of Chicago’s Michael Dinerstein, Ching-Tse Chen, and Constantine Yannelis found in their study, in which they compared borrowers whose payments were paused with those who were required to keep making payments:

We find that, relative to borrowers who had to continue paying their loans, borrowers who had a pause in their payments sharply increased mortgage, auto, and credit card borrowing. We find little effect on loan delinquencies. The effects appear driven by increased credit demand and ability to service loans, as opposed to a credit supply effect. The results indicate that debt payment pauses can increase consumption in the short term, but that overall debt increases, as borrowers use increased liquidity to service new debt.

Having their student loans on pause gave these borrowers more cash, which they turned around and used to pay for new loans. Loans they took out after their student loan payments were paused.

How much deeper in debt?

How much more debt have these student loan borrowers taken on?

… we find that the student debt payment moratorium led to higher levels of overall leverage, not only through borrowers not paying down student debt balances, but also through the accumulation of other types of household debt. By the end of the sample period, student debt borrowers have about 5% more household debt, driven roughly half by student and non-student debt. Perhaps paradoxically, temporary student debt relief leads to higher overall household debt levels and larger future debt burdens.

Economist Alex Tabarrok explains what’s good and bad in these findings:

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.

As a form of stimulus, the student loan debt pause has undoubtedly contributed to the inflation of the last two years, thanks mainly to President Biden’s pledge to make it permanent. The debt ceiling deal, however, will soon make that an empty pledge for many borrowers. Meanwhile, other parts of Biden’s student loan forgiveness scheme have strong odds of being found unconstitutional by the Supreme Court, which will soon issue rulings on the issue.

The study also tells us a little about the borrowers themselves. These are all people with at least some college education because that’s who is eligible to get student loans in the first place. With more education than the general population, these people make more money than most Americans after leaving school.

Common sense would say that unless and until President Biden’s forgiveness scheme is locked in by law, it cannot be counted upon to provide any relief. In adding to their personal debt burdens without that sureness, these smart people chose to gamble President Biden would reward them despite the President lacking any evident ability to deliver on his pledge.

It does raise the question of what these highly educated people learned at the institutions of higher learning they borrowed to attend. The same colleges and universities that cashed the checks they were paid from student loans long ago. Their indebted former students are about to learn a real-life lesson when their delayed higher education bill finally comes due in full.