During economic disruptions, governments seek to stimulate growth and smooth consumption by making direct cash transfers to households. During the COVID-19 pandemic, the US government also ordered a pause in payments due on federal student loans.
This policy was effective in supporting the economy, even more so than the Biden administration’s subsequent student-loan-forgiveness plan, according to University of Chicago’s Michael Dinerstein, Chicago Booth’s Constantine Yannelis, and Booth PhD student Ching-Tse Chen. They find that households subject to the pause increased their short-term consumption and bolstered the economy—but did so by taking on an additional $1,800 in debt.
Using data from the TransUnion Consumer Credit panel at Chicago Booth’s Kilts Center for Marketing, the researchers analyzed an anonymized 10 percent sample of all TransUnion credit records from 2018 to 2022. They exploited an arcane wrinkle in the government’s student-loan programs: the payment moratorium applied only to debt due directly to the government and not to loans made by private financial institutions with federal backing.
From the TransUnion data, the researchers extracted a sample of almost 300,000 borrowers who didn’t have to make payments under the program and compared it with a sample of 355,000 borrowers who were excluded from the moratorium. The loan pause lasted from March 2020 through June 2023 and affected $1.45 trillion of student debt held by 25 million borrowers. About $250 billion of such loans owed by 12 million others weren’t eligible.
The researchers find that student-loan payments dropped by an average of $138 a month for those who benefited from the pause compared with those who didn’t. Moratorium borrowers were also less likely to be delinquent on their student loans, and their credit scores averaged about 8 percentage points higher than the unpaused borrowers during the study period.
But by the end of 2021, thanks to the pause, debtors who had taken advantage of the freeze had outstanding student-loan balances that were an average of $1,500 higher than those of borrowers who continued to make their monthly payments.
And by the end of the sample period, in 2022, student-loan borrowers affected by the pause also had about 5 percent more household debt than they did before, owing an additional $1,800—mostly mortgage payments and revolving debt—with an additional $20 a month in payments. This suggests that temporary student-loan relief leads to higher overall household credit and larger future debt burdens.
The researchers find that the debt pause was more effective in smoothing consumption than the proposed student-loan-forgiveness plan, which they calculate had no effect at all in terms of increasing spending. This, they write, “suggests that less costly liquidity-targeting policies may be more effective than direct transfers.” (The Supreme Court later nullified the debt-forgiveness plan, but the administration then sought to revive it using a different legal rationale.)
But the increases in individuals’ debt burden may have a boomerang effect, as studies have demonstrated that higher levels of leverage can have a negative effect on aggregate consumption.
Michael Dinerstein, Constantine Yannelis, and Ching-Tse Chen, “Debt Moratoria: Evidence from Student Loan Forbearance,” Working paper, May 2023.
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