It’s hard to argue that the student loan payment moratorium was somehow bad for borrowers. But some economists are still trying.
Well, it’s finally happening: the federal student loan moratorium is finally coming to an end.
This has been slated to happen a number of times, but this is the first time where the ending has been written into law. Specifically, in the recent debt-ceiling negotiations between the Biden Administration and Congress, they specifically wrote that the end would come “60 days after June 30“. (Why they couldn’t just say “August 29th” is a mystery to me.)
So as of a few months from now, if you have student loan repayments, you’re on the hook again.
A bittersweet moment, for sure, but as the original reason for the pause was a response to the mass unemployment due to COVID-19, it’s hard to argue that this pause is still relevant. The pandemic may or may not be over, but as far as unemployment is concerned, it’s done.
So we should all give thanks for the moratorium we had, right?
Well, maybe not, because a new research paper shows that the student loan holiday wasn’t necessarily all good for the borrowers who seemingly benefited from it.
What does the paper say, and should we believe it?
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Conflicting studies: Moratorium was good
Let’s first look at one study that came out in March of 2022 from the California Policy Lab.
Among much else, it states two interesting findings:
“The student loan pause accomplished its principal aim of alleviating student loan repayment burdens during the pandemic. Affected borrowers had their overall monthly debt obligations fall by an average of $210 each month as a result of the pause.”
“Pause-affected borrowers experienced improved credit outcomes during the pause. The average credit score among affected borrowers rose from 640 to 668.”
This all seems to check out, right? Without needing to pay back student loans, this gave more financial flexibility to those people, who can (and did) presumably work to improve their situation. All good.
Conflicting studies: Moratorium was bad
Or not. Because the University of Chicago just came out with a paper, referenced in The Economist (paywalled, alas) called Debt Moratoria: Evidence from Student Loan Forbearance.
While they note that there was a drop in delinquencies, there was also a substituting effect, as borrowers added debts in other areas of their lives, such as credit cards, mortgages, and auto loans.
As The Economist puts it:
“They found that the payment freeze reduced delinquency rates on student loans and boosted credit scores, but did not affect delinquencies on other debts. Nor did the policy reduce loan balances—in fact, it did the opposite. By the end of 2022 beneficiaries of the moratorium accumulated an additional $2,500 in student-loan debt and an additional $2,000 in credit-card, mortgage and car-loan debt, boosting total household indebtedness by 8%.”
So people took the extra money they then had, and ended up adding 8% on average to their household debt.
How to interpret this
So what are we to make of these findings? Should we change our minds and look at this attempt at helping borrowers in a time of need as misguided?
That’s certainly what The Economist is saying:
“Back in April 2022 Mr Biden warned that the resumption of student-loan payments could lead to ‘significant economic hardship’ for millions of borrowers. Little did he know that his own policies would be partly to blame.”
Sick burn, The Economist. But it’s not the whole story.
First, we have to acknowledge that we don’t really know the counterfactual case, that is, what these people would have done if there hadn’t been a student loan moratorium.
The authors of the paper attempted to address this by comparing those who were eligible for the payment holiday with those who weren’t (as in, who had private loans), and they noted that those who had the holiday ended up with more debt. But this isn’t totally an apples-to-apples comparison, because those are different borrowers in potentially different financial situations.
A holiday is still a cause for celebration
Now, according to U.S. News, the average monthly student loan payment is around $300.
That means that over the 41-ish months of this moratorium, borrowers have not had to pay roughly $12,000. And that’s interest too.
Some paid anyway. In fact, some people took advantage of the interest holiday and got more aggressive about paying down their loans, and even paying them off.
But not everyone did, and that’s fine. They took that $12,000 and put it into other things, like cost increases on everything.
And some of them added some debt to their balance, on the order of a few thousand.
I don’t know about you, but any way I run the numbers, borrowers have come out ahead. They got a reprieve, and weren’t ever penalized for it.
Now pay them off
But now that the holiday is over, it’s time to get back to work paying off your student loans.
Note that if you were on autopay before the freeze, you’ll need to set that up again. Automatic payments will not automatically restart. This is important; you don’t want to start out on the wrong foot.
Ultimately, regardless of these findings, I think the last thing we should take away is that the student loan payment moratorium was somehow a bad idea. Perhaps it went on longer than it strictly needed too. And educational costs really needs to be reformed. And we can all hope that the student loan forgiveness plan goes through one day.
But this holiday from payments helped people, and in a myriad of ways. If you picked up a little bit of debt along the way, that still seems like a small price to pay.