Lessons from the Student Loan Payment Pause

The student loan payment pause is officially over, with payments resuming this month.

What was the student loan payment pause?

One of the policies enacted when the COVID-19 pandemic hit in March 2020 was a student loan repayment pause. During the pause, loan payments were not required, interest did not accrue, and involuntary collections (e.g., wage garnishments) were suspended. The original pause was only scheduled to last two months. But it has been continually renewed, with payments only restarting three and a half years later in October 2023.

How much did the student loan payment pause cost?

The most thorough accounting of the cost of the pause was buried in a Government Accountability Office report, but they only detailed costs through May 1, 2022, while the pause lasted for nearly a year and a half longer. Accounting for the cost of this additional time, the Penn Wharton Budget Model estimates the total cost at $210 billion, and the American Enterprise Institute’s Nat Malkus estimates a total cost of just under $240 billion for the program.

But both estimates are just that, estimates. If all the payment pause did was change the timing but not the number of payments, then once you settle on a discount rate, finding the cost in present value terms is a straightforward math problem. The policy would still cost the government, but the cost would be much lower and largely driven by the government’s own cost of borrowing. But the pause also affected the number of payments borrowers will make due to the interaction with income-driven repayment plans. These plans require students to repay for a set amount of time, and the payment pause counts toward that time. In other words, even though they never made payments, the government treats them as if they did. So for some students, it wasn’t a repayment pause, it was a repayment waiver, while for others, it was a pause because they will end up repaying their loan before the forgiveness provisions kick in. It will be years before we know how many borrowers merely paused payments compared to how many received payment waivers.

Who benefited from the student loan payment pause?

The main beneficiaries were student loan borrowers who would have otherwise been making payments for the past three and a half years. However, because students earning graduate degrees tend to borrow more and earn more, it was actually the rich that benefited the most. In fact, Sarah Turner found that “the payment pause especially benefits high-income households because they tend to have larger student loan balances—and therefore higher payments.”

How did the pause affect borrowers?

Prior to the pause, there was a narrative that many (including myself) believed. It went something like this: As college costs increased over the past few decades, more students resorted to student loans to cover the costs. The result was rising student loan debt, and this debt in turn made it difficult for college students to buy a home or start a family. If we could reduce college debt, student’s financial circumstances would dramatically improve.

However, the student loan payment pause revealed that this narrative is not true—or at least has some gaping holes. According to the narrative, the student loan payment pause should have enabled borrowers to pay down other debt like credit cards with high interest rates. But Michael Dinerstein, Constantine Yannelis, and Ching-Tse Chen found that borrowers “do not use their additional liquidity to pay down other debt. In fact […] household leverage increases by $1,200 (3%)” as borrowers used the pause to “increase borrowing on credit cards, mortgages, and auto loans.” In other words, rather than using the pause to improve their financial position, borrowers just took on more (non-student loan) debt.

Lessons from the student loan payment pause

Progressives, conservatives, and policy analysts have all learned valuable lessons from the pause.

Progressives want all student loans to be forgiven. And while the Supreme Court has (so far) prevented the Biden administration from jamming that policy through without congressional authorization, they learned that emergency declarations allow them to steamroll the opposition. In fact, with the student loan payment pause, progressives really did enact de facto loan forgiveness on a massive scale, to the tune of around $200 billion. By comparison, we spend about $26 billion on Pell grants each year. I expect more emergency declarations (e.g., “a climate emergency”, an “existential threat to democracy”) by progressives to circumvent the political process.

Conservatives learned that if they give an inch, progressives will take a mile. The first pause, implemented in March of 2020, wasn’t a terrible idea. At that point, we simply didn’t know how many people would lose their jobs, so a universal pause was a decent proposal. Yet that initial magnanimity was repaid with repeated extensions of the pause that cost taxpayers dearly. It’s similar to how income-driven loan plans morphed from a safety net for the unwise or unlucky into a massive giveaway (the first plan required borrowers to repay 20 percent of income for 25 years, whereas the just-announced plan requires only 5% of income for as little as 10 years).

For policy analysts, we learned that Anne O. Krueger is vastly underrated. We should all read and then reread her work on sugar subsidies until the message sinks in: once implemented, your ideal policy will be hijacked by others, so plan accordingly. Krueger illustrated this lesson in a fascinating 1988 paper on the history of sugar subsidies. While ostensibly a dry topic, it turns out sugar subsidies were key to Hawaii becoming a state, why U.S. soda uses high-fructose corn syrup even though soda in other countries don’t, and a shocking number of political corruption scandals. Needless to say, these were not the issues that initially motivated U.S. sugar policies, yet once policies were enacted, they took on a life of their own as both economic and political interests adapted and, in many cases, seized control. The lesson that Krueger drew from this sordid experience:

once created, a policy instrument will: 1) be seized upon by groups who perceive themselves to benefit . . . 2) induce economic market reactions . . . 3) lead to political responses to (2) by the groups formed under (1) to attempt to offset these economic market reactions, which in turn will lead to 4) increasingly complex policy instruments designed both to deal with the competing interest groups that form around the policy instrument and simultaneously to subvert the sorts of market responses perceived to be detrimental. This sequence . . . suggests that, once an instrument is in place, a variety of political forces will emerge that will act upon it and try to seize it in ways that are largely unpredictable. . . .

. . . this “life of its own” hypothesis is the most disturbing for potential economist—policymakers. If the hypothesis is correct, it says that even if a program is designed to meet socially desirable objectives in cost-minimizing ways, it will likely be seized upon by groups and in circumstances only remotely related to the initial intent of the program. Once put in place, a policy may evolve in ways unrelated to the initial purpose.

This is precisely what happened with the student loan payment pause. It started as a noble effort to provide financial relief in the face of a severe pandemic. Yet, it was quickly seized upon to advance unrelated political interests. The first offense was by President Donald Trump, who extended the pause to avoid angering college graduates by restarting payments just before the 2020 election. The next offenses were by President Joe Biden, who kept extending the pause because it allowed him to achieve a goal (student loan forgiveness) to pander to a core progressive constituency.

For those who design policies, we must anticipate the likely next steps and find ways to limit the policy from being hijacked. So, taking the initial goal of providing payment relief as a given, what should we have done? In retrospect, college graduates who already had jobs and kept them did not need a pause, while graduates who were laid off due to shutdowns and new college graduates (the job prospects for whom disappeared overnight) did need help.

But policymakers had already designed safety nets for those who face an adverse job disruption (income-driven repayment plans, which will reduce a borrower’s monthly payment to $0 while unemployed) and new graduates (a six-month grace period after graduating before payments are due). Thus, rather than the pause, we should have automatically enrolled borrowers who missed several payments into an income-driven repayment plan as well as extended the grace period.

By limiting the assistance to those who truly needed it, this policy would have been much less likely to be hijacked by political operatives in both the Trump and Biden administrations. Because many fewer people would benefit, it would have been less politically appealing to extend the policy for ulterior motives. Repeated extensions would have also generated more resentment among borrowers who were not benefiting, creating political pressure to ensure the policy was not unnecessarily extended.

In retrospect, the student loan payment pause was a huge and costly mistake. While the initial pause may have been appropriate, it should have been clear that the pause would be extended for political reasons when an election was close, and for ideological reasons if progressives won the election. This predictable political hijacking of a decent policy is why we can’t have nice things.

Photo by Tim Gouw on Unsplash