A new working paper published in the National Bureau of Economic Research found that federal student loan borrowers — whose monthly payments and interest accrual have been paused since the start of the COVID-19 pandemic — increased their borrowing on credit cards, mortgages, and auto loans rather than avoiding delinquencies during the pause.
The study, conducted by researchers out of the University of Chicago, examines the effects of the 2020 student debt moratorium and suggests that as borrowers' federal student loan debt was frozen, their private debt increased.
The paper used data from the Booth TransUnion Consumer Credit Panel and only included borrowers whose most recent loan was opened in 2010 or earlier. The final sample for this study includes 299,637 Direct Loan borrowers and compares those results with 354,680 Federal Family Education Loan (FFEL) borrowers.
Specifically, the finding that private debt increased during the pause is concentrated among borrowers without prior delinquencies, who likely saw no change in their credit supply, and shows that borrowers’ demand for credit increased as they had more liquidity. One of the study’s researchers, Michael Dinerstein, said “never delinquent” borrowers tend to have high credit scores, and that their credit scores hardly budged in response to the debt moratorium even though they ended up taking out much more debt than before.
“We speculate that the interaction is that borrowers take out more debt when they have cash on hand because they now find it easier to either post a down payment or to cover the first few months of payments,” Dinerstein said.
This finding was surprising, Dinerstein said, because he expected borrowers to save the extra cash they would have from not making student loan payments. Additionally, going into this study, Dinerstein said he expected that the student loan repayment moratorium would give borrowers the chance to avoid defaults on other debt. But to his surprise, the study didn’t find evidence of this.
“The pandemic disrupted people's lives such that they may have had trouble paying back prior debt, such as a mortgage, that they could pay back during normal times,” Dinerstein said. “Thus, the payment pause would provide a way to avoid other defaults.”
As the student loan payment pause is set to end in the coming months after the U.S. Supreme Court makes its decision on President Joe Biden’s student debt relief plan, there could be concerns about how borrowers' debt obligations have grown substantially during the pandemic.
“The increased borrowing on mortgages, auto loans, and credit cards mean that borrowers' debt obligations have grown substantially,” Dinerstein said. “Once the student debt moratorium ends, I worry whether borrowers have enough earnings and liquidity to pay back larger amounts of total debt.”
Dinerstein adds that a potential way to address this concern is to make sure borrowers are enrolled in an income-driven repayment plan. Additionally, he said that he’s worried that other disruptions during the last few years could cause issues when the payment pause ends, such as issues with loan servicers shutting down.
“Some borrowers may thus have a new servicer and there may be some administrative challenges with this switch,” he said. “Borrowers may not even realize this change until they have to start making payments again.”
The study also analyzed the impact of Biden’s student loan debt relief, which would cancel up to $20,000 in student loan debt for eligible borrowers. The study found no significant impact on borrowers’ use of credit following the August 2022 announcement, suggesting that borrowers did not change their behavior anticipating that some or all of their student loan debt may be canceled.
Publication Date: 5/26/2023