The Patriot Post® · Student Loan Payment Pause Created More Debt

It’s been said that elections have consequences. And one clear case of this is the mess we’ve made of student loans.

Donald Trump’s administration instituted a pause on student loan payments back in 2020 as a temporary measure to help people who may have been thrown out of a job because of pandemic-related shutdowns. Yet here we are in June 2023, and an edict that was initially supposed to be two months long will finally be rescinded in August, when the recently passed debt ceiling agreement is implemented.

Meanwhile, the Supreme Court is expected to announce its decision later this month regarding Joe Biden’s shameless attempt to forgive a portion of almost everyone’s student loan — which of course outrages those of us who scrimped and sacrificed to pay off our own college debt after years or even decades. Sanity is expected to hold there, as the Court is expected to declare that portion of Biden’s idea unconstitutional. We’ll believe it when we see it.

Here in our humble shop, we’ve spent a lot of time over the last few years talking and writing about this issue. While the political endgame has been debated here, we’ve generally been of one mind that the idea of the government magically forgiving someone’s student loan debt sets a very bad precedent, with the government-decreed pause in payments also setting a poor example.

To that end, we’re a bit surprised it’s taken this long for economists to see the effects that this lengthy student loan payment back-and-forth has had on the financial habits of those who’ve benefited from it. If you believe Emma Camp at Reason Magazine, the verdict is in: The student loan pause has made borrowers worse off.

While we agree with Camp’s assessment, it’s always helpful to look at the source. A “working paper” by three University of Chicago researchers at the National Bureau of Economic Research comes to the conclusion that the beneficiaries of this forbearance went into debt elsewhere instead of holding a little bit back for when the party came to an end. The trio compared borrowers who were subject to the payment pause because of the source of the loan — the federal government — with those who weren’t subject to it because they borrowed from private entities with simply a government guarantee. The results, frankly, were not surprising.

“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,” said researchers Michael Dinerstein, Ching-Tse Chen, and Constantine Yannelis. They went on to note that the pause had a stimulus effect of increasing the consumption of those freed from paying on student loans, but they were consuming more than the paused amount allowed for.

“We find that the payment pause had a large effect on immediate consumption,” they continued. “Policymakers focused on boosting short-term consumption, especially for stimulus effects, may then find debt moratoria to be effective policy tools at relatively low long-term fiscal cost. At the same time, 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.”

But so long as it leads to more Democrat votes in 2024 — as it may well have in 2022 — then the Biden administration doesn’t care about these unintended consequences.

There’s also a secondary aspect to this that should be discussed as well. Thousands of borrowers are taking advantage of a different sort of loan forgiveness called an Income-Driven Repayment Plan that the left-leaning Brookings Institution claimed last September will “turn student loans into untargeted grants.” This may be a windfall for the “funemployment” crowd, which can simply borrow extra to cover their living expenses.

“While students certainly need to pay rent and buy food while in school, under the administration proposal a student can borrow significant amounts for ‘living expenses,’ deposit the check in a bank account, and not pay it all back,” noted Adam Looney of Brookings. “Some people will use loans like an ATM, which will be costly for taxpayers and is certainly not the intended use of the loans.”

Looney also notes, “On average, borrowers (current and future) might only expect to repay approximately $0.50 for each dollar they borrow,” adding that some lucky folks may have their debts completely forgiven, and will in essence be getting free money.

Of course, it won’t be free for the suckers productive and hardworking people out there who’ve made good on their debts and paid back their student loans. For us, it’s just an expensive lesson in Democrat politics.