Did You Know? Student Loan “Pauses” Help Those Who Can Afford to Pay

At the outset of the COVID-19 pandemic, policymakers implemented sweeping relief programs to offset the economic shock of lockdowns, layoffs, and shifts in consumer behavior. Among these actions was a provision for the blanket forbearance of student loan debt for 42.3 million borrowers.

Despite the well-intentioned nature of such “payment freeze” policies, little was initially done to study their effectiveness. However, a recent report from the Consumer Finance Institute (CFI) at the Federal Reserve Bank of Philadelphia indicates that the needs of struggling borrowers have not been met.

According to the CFI, this is because borrowers’ inability to make payments was primarily a result of insufficient income and employment opportunities rather than the “transitory labor market and income shocks that occurred during the pandemic.”

Lawmakers’ stated objective for the (ongoing) payment freeze was to provide borrowers with time to pay down other debts and build savings, so that student loan payments could be resumed after the pandemic. However, the CFI found that only 16 percent of borrowers cited paying other debts and building savings as reasons for previously neglecting student loan payments. 67 percent of those not making payments said that their failure to pay was due to an inability to afford the bill.

Borrowers’ inability to make payments is not a result of pandemic-related financial turmoil.It appears, therefore, that borrowers’ inability to make payments is not a result of pandemic-related financial turmoil but, rather, a poor return-on-investment from their college degrees. Perhaps focus should shift away from payment freezes (or outright debt “forgiveness”) and toward holding accountable those colleges that are not preparing their graduates for jobs that provide sufficient income for student debt financing. As the CFI states, “chronic repayment struggles are primarily the result of education debt that did not lead to income and employment outcomes to support that debt.”

Yet, rather than pursue a policy of accountability, officials have opted to renew blanket forbearance six times thus far, despite the fact that three-quarters of the borrowers who were making payments before the pandemic likely never needed their loans frozen. According to the CFI, “blanket forbearance extensions are costly and benefit the majority of borrowers who neither expect to struggle with their payments when the payment pause ends nor appear to be shoring up their savings or paying off other debts.”

What the CFI’s data reveal is that student loan debt forbearance is a costly policy that neglects the root causes of the plight of those with chronic repayment struggles. Simultaneously, it unnecessarily relieves those who are able to pay, at the expense of taxpayers.

After reviewing its own findings, the CFI recommended that, in the future, the Department of Education “substitut[e] more grant aid for student loan aid for low-income students [and strengthen] the design, implementation, and adoption of effective income-driven repayment plans.” Yet, while these reforms may prove to be less wasteful than blanket forbearance, they still fail to address the underlying issues of skyrocketing tuition and insufficient career preparation.

In sum, the ongoing freeze of student debt payments (and the Biden administration’s forthcoming partial “cancellation” of that debt) are not solutions to the student debt crisis. Rather, they are expensive and misguided policies that only delay our reckoning with the real underlying crisis.

Harrington Shaw is a summer ’22 intern at the James G. Martin Center for Academic Renewal and a rising junior studying economics and philosophy at UNC Chapel Hill.