Study: Student Debt Relief Improves Job, Income, Credit Outcomes

By Allie Bidwell, NASFAA Managing Editor

As outstanding student loan debt continues to increase, lawmakers and higher education stakeholders have proposed different methods for relieving borrowers of their debt, from making changes to repayment plans to allow for a quicker path to forgiveness, implementing policies that could help reduce borrowing on the front end, or outright cancelling student debt for distressed borrowers.

In a working paper published by the National Bureau of Economic Research (NBER)—written by Marco Di Maggio of Harvard Business School, Ankit Kalda of Indiana University, and Vincent Yao of Georgia State University—researchers found that borrowers who had their private loans discharged reduced their indebtedness overall by about 26%, were 11% less likely to default on other loans, and were more likely to change jobs and increase their incomes by about $3,000 over a three-year period. 

The paper utilized credit bureau data—which tracked monthly payments, loan amounts, and employment and income information for borrowers—to track the behavior of thousands of borrowers who received debt relief after National Collegiate Student Loan Trust was ordered to repay $3.5 million to borrowers after courts ruled the company could not prove it owned the debt on which it was trying to collect. 

The researchers found that on average, the debt relief led to a $6,855 reduction in student loan balance, a substantial decline, they said, for borrowers who on average earned $2,376 per month. They also found that borrowers who experienced debt relief reduce the number of accounts across all types of loans (home, auto, and credit card accounts), and decrease the balance on existing accounts. Borrowers who experience debt relief were found to be less likely to default, to file for bankruptcy, and to be subject to foreclosures or default on medical bills. 

“These findings speak to the potential spillover effects across liabilities and to a potential indirect benefit of intervening in this market by helping borrowers unable to afford their student loan debts,” the authors wrote. 

Those borrowers who experienced debt relief were also more likely to move to another state, suggesting they may be able to pursue other opportunities without the burden of student loan debt, the authors wrote. Those borrowers’ income also increased by more than $3,000, “likely due to the borrowers’ ability to accept better jobs,” they wrote. 

“These findings speak to the importance of debt overhang for these borrowers, who seem to be constrained by the presence of student loans on their record,” they wrote. “This occurs because many employers check credit reports for hiring decisions, so the discharge is likely to make these borrowers better job candidates. Also, since student loans are not discharged in bankruptcy, these borrowers might not pursue high risk-high pay jobs, because they would need to pay these loans and prefer more stable income.”

The findings taken together show, the authors argue, that “debt overhang might be a real issue facing millions of student loan borrowers, which significantly shapes their behavior.” 

“We find that the borrowers experiencing the debt relief shock are significantly more likely to engage in deleveraging, by both reducing their demand for credit and limiting the use of the existing accounts,” the authors wrote. “That is, borrowers benefiting from a debt relief seem to quickly try to improve their financial conditions. … Overall, these findings speak to the forceful impact that interventions in this market could have on these individuals.”

 

Publication Date: 7/8/2019


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