Opinion | Student loans prove you can’t have it both ways

Before we go on, I should note that while these ideas are often spoken in the same breath, they are not necessarily compatible. If student loans are forgiven, would people spend the extra money and boost the economy, or would they save it and improve their own finances?

To some degree, this tension can be resolved if you assume household savings get recycled into the economy as investment, which then gets spent on stuff. But the counter to that is that if people don’t repay their student loans, then the government will eventually need to make up that lost revenue by raising taxes, which pulls money back out of the economy, re-creating at least some of the economic drag you were trying to alleviate.

In other words, as with so many policy questions, the real-world impacts are complicated, and a lot depends on details: how forgiveness and tax cuts are structured, and what households do when you relieve them of their debt burdens. That’s where the government’s response to the pandemic is useful.

In March 2020, the Trump administration temporarily suspended payment on student loans owned by the government (which was almost all of them.) Since then, this order has been extended eight times, and is still with us, even though the emergency that spawned it is officially over.

A working paper out of the Becker Friedman Institute for Research in Economics by economists Michael Dinerstein, Constantine Yannelis and Ching-Tse Chen compares what happened in households that had loans eligible for the moratorium with those whose loans were privately held, and thus outside the emergency pause.

Some of the effects were unsurprising: People who didn’t have to make payments had more disposable income and fewer delinquencies on student loan debt; as a result, their credit scores were on average somewhat higher. They also, of course, ended up with higher student loan balances — around $1,500 worth — because unlike their counterparts with private loans, they weren’t making payments to reduce the principal.

Somewhat more surprisingly, the pause on student loan payments didn’t do much for delinquencies on other kinds of debt — people whose loans were on hold mostly don’t seem to have used the breathing room to get caught up on their credit cards or mortgage payments. Rather the opposite, in fact: Mortgage, auto and credit card debt all rose by an average of $1,200. Overall, household indebtedness not only didn’t improve for those who benefited from the pause, but deteriorated to the tune of almost $2,700.

A few takeaways follow from this. First, while we often talk about a policy working, or say it doesn’t work, reality is more complicated: Policies can work on one dimension and fail on another. Pausing student loan payments can boost the economy, quickly, by keeping people spending. On the other hand, if you think of student loan relief as a way to help upwardly mobile households build generational wealth, these results are much less encouraging.

A second observation is that it’s hard to get people to save more. Yes, we managed during the pandemic by firehosing money into bank accounts at a time when there was a lot less to spend it on — but as things began reopening, the personal savings rate dropped to well below its pre-pandemic average. And in more normal times, policymakers struggle to raise savings appreciably — economists are still debating whether tax-advantaged savings accounts such as 401(k)s, one of the most popular savings programs of all time, actually increase the savings rate.

Which brings us to the third and most important lesson, or rather, a reminder: While people do respond to incentives, they often respond somewhat unexpectedly.

For example, one effect of tax-advantaged savings accounts is to increase the benefit of saving, which ought to encourage people to save more. Another effect, however, is that people who are targeting a certain level of savings don’t need to curb their spending as much to reach that target. If you’re the kind of person who thinks mostly about the first sort of incentives, it might not occur to you to account for the behavior of the kind of folks who focus on the second. Which is why a wise policymaker always remains open to surprises, up to and including the unpleasant discovery that they’ve mostly missed their mark.