Student Loan Repayment Pause Was Not Only Bad for the Economy, But Also the Borrowers of Student Loans

The debt ceiling debate is over with a bipartisan deal called the Fiscal Responsibility Act of 2023 that President Biden signed on June 3. Part of that Act was putting an end to the pause of payments for federal student loans. This pause has existed since March 2020. Why did the pause come into being in the first place? When President Trump declared the COVID pandemic an emergency, he used his executive authority to waive the collection of interest and suspended student loan payments on all government-held student loans. The premise of this pause was to help borrowers weather the economic uncertainty that came with the harmful lockdowns and other onerous COVID restrictions. Similar to Title 42, Trump should not have enacted the pause and Biden should not have continued extending it for a few reasons: 

• The Left-leaning Brookings Institution finds in its analysis that the pause is regressive, which is to say that the pause has disproportionately benefited the most affluent of borrowers. The reason for this is people in higher-paying professions (e.g., doctor, lawyer) tend to borrow more at higher interest rates. 
• In September 2022, President Biden said that the pandemic is over. I would argue that it ended beforehand, but it still begs the question: why is this pause in effect well after the pandemic is actually over?
• As I explained in my August 2022 critique of student loan forgiveness, college graduates are in better financial shape than the average American.  
• The bipartisan Committee for a Responsible Federal Budget (CRFB) calculated that the pause has cost $5 billion a month, which would mean that it has cost about $190 billion to date. 
• In August 2022, CRFB showed that the student loan pause contributed to inflation by a) reducing the amount of income household use to pay off debt, b) increasing household wealth, and c) putting upward pressures on college tuition costs. This higher inflation will only make it harder for borrowers to pay off their debts.

One could argue that the economy could handle it and that it's about helping out the less fortunate with their financial instability. It certainly was the argument the Biden administration made late last year. There might be some intuition to that notion, but a working paper from the National Bureau of Economic Research entitled Debt Moratoria: Evidence from Student Loan Forbearance puts that notion very much into question. The researchers found the following:

We find a large stimulus effect, as borrowers substitute increased private debt for paused public debt. Comparing borrowers whose loans were frozen with borrowers whose loans were not frozen due to differences in whether the government owned the loans, we sho that borrowers used the new liquidity to increase borrowing on credit cards, mortgages, and auto loans rather than avoid delinquencies. The results highlight an important complementarity between liquidity and credit, as liquidity increases the demand for credit even as the supply of credit is fixed.   

Per the report, those who saw their federal student loans paused took on an average of $1,800 more in credit card, mortgage, and loan debt, while also taking on an extra $1,500 in student loans. That is the paradox here: pausing the federal student loans resulted in higher overall household debt and larger future debt burdens. Not only did it cost the taxpayers billions, but it did not manage to the help the people who the pause was meant to benefit. Whether it is minimum wage, lockdowns, Obamacare, or redlining, the student loan pause is another example of a larger trend of government policies harming those it was intended to help.