The Great Student Loan Pause and Its Impacts

It has now been over two years since the federal student loan pause began in March of 2020. After multiple extensions of the original pause, alas, the end date of May 2022 has been once again extended, now until August 31st, 2022. The odds are that repayment won’t begin then either, in my humble opinion.

Background

I’ve written and talked about student loans and various repayments options for six years now on this website. Over the years I’ve done a lot of research, calculations, and planning regarding managing my own student loan debt. For anyone who has read any of my articles in the past, you’ll know that I personally have chosen to go on an income driven repayment plan while focusing heavily on investing, rather than paying off my student loans (a decision which was initially questioned and criticized by many, but has since become more accepted and adopted by a large percentage of new grads).

With that being said, this extremely lengthy pause in not only payments but also in the accumulation of interest on student loans has been baffling to me. You see, part of my reasoning for keeping my student loans, in addition to the math, was the uncertainty regarding how politicians would change loan repayment or forgiveness in the future. While some argued that loan forgiveness programs may be eliminated leaving people like me holding the bag, I always believed that the more likely outcome was that legislation would be passed easing the burden on student loan holders, not making their situation worse. My reasoning for this was that unreasonable tuition inflation has been evident for well over a decade, causing student loans to be one of the biggest concerns for people my age and younger. Over 43 million Americans currently have student loan debt, with over 2.5 million of those having a total student debt burden of $100,000 or more, and this is only getting worse as tuition prices continue to rise at unprecedented rates. With increasing numbers of voters saddled with unrealistic student loan debt over time, the pressure on politicians to make meaningful improvements will only increase. I thought that the improvement would most likely come either in the form of a blanket amount of student debt forgiven for each individual (most likely a small amount, but still meaningful); a blanket reduction in current and future student loan interest rates; or an elimination of the taxes owed on “unearned income” after student loan forgiveness under current IDR plans. All of these would be helpful for current borrowers. What was not on my Bingo card was a sudden extended pause in both payments and interest for all federal borrowers.

Concerns with the Pause

I believe that the initial student loan pause was warranted. Covid was spreading quickly around the world; the projected case fatality rate was over 2%; countries and states were locking down; businesses were closing; employees were laid off; and the future was very uncertain. With everyone panicking about health and economic implications of the pandemic, it was nice for the millions of borrowers to not have to worry about their student loans for a while, especially for those losing jobs or dealing with reduced hours.

However, what I don’t believe is justified are the continual extensions of the pause. The biggest reason why I think the handling of this situation has been negligent is inflation.

The student loan pause coincided with three rounds of stimulus checks, PPP loans for businesses, and very generous enhanced unemployment benefits. This led to increased demand in the economy because these benefits weren’t paid for through taxation, but through Federal Reserve balance sheet expansion. Now I understand that unprecedented times can call for unprecedented measures, but when you combine the extra demand from all of the newly printed dollars funded by the Federal Reserve with supply side reduction due to supply chain issues, inflation is the result. It definitely didn’t take a PhD in economics to see this coming. We finished 2021 with an inflation rate of nearly 5%, and that rate has only accelerated in Q1 of 2022 due in large part to this supply/demand imbalance. Now even to some of the most reluctant Keynesian economists, it’s being accepted that the combined increased demand from all of these programs caused inflationary issues. Two years after all of this began, all of these programs and benefits have been stopped in an effort to slow inflation and return to normal. All except the student loan pause.

Now you might think the inflationary pressure from the student loan pause isn’t significant, but when I did the math, the results were surprising. I’ve seen many pundits and individuals on various social media platforms over the last year blaming inflation on stimulus checks given out, but in reality, the student loan pause has to also take some blame. In total, three stimulus checks were given out in the US between 2020-2021 in the amounts of $1200, $600, and $1400 to adults, and $500, $600, and $1400 for children. The total amount of all of these payments is estimated at around $867 billion. That’s undoubtedly a huge amount of additional demand in the economy. But, how much additional demand has been created by the student loan pause? Looking at the data and doing some quick math using the total number of federal student loan borrowers (43.4 million) and the average student loan payment per borrower ($393) we can see that each month since the pause began, over $17 billion is being kept in the pocket of borrowers instead of sent to loan servicers. The pause has been going on for 24 months now and scheduled for another 4 months after the most recent extension. In total this will mean $477 billion in additional money that was able to be spent by borrowers, fueling inflation, instead of being sent to loan servicers. That’s more than the amount distributed from the first two stimulus checks combined! Now of course, not all of that money was actually spent by borrowers. Some have continued to pay down their debt during the pause, some have put the money in savings accounts, and some have used it to invest. But, if even half of that money was spent on things like cars and down payments on houses, that would have a meaningful impact on inflationary pressures. The longer the pause, the more the cumulative impact of the money saved each month on supply constrained goods.

Another concern I have regarding the extended pause is the moral hazard created by giving college educated individuals what essentially amounts to a massive tax break at the expense of the average taxpayer without student debt. It’s long been clear that with higher levels of education come higher amounts of yearly income on average, and over a lifetime this creates quite the wealth gap between the college educated and the non-college educated. By taking the monthly student loan payment and interest accumulation burden off of those of us with student loan debt, and distributing it through the population in the form of future tax burden, this only serves to further increase that wealth divide. It also sets a precedent that during any crisis in the future, student loans may be paused, which will likely influence the amount of student debt accumulated by current and future student borrowers.

All of this is not to mention the fact that those that did choose to pay off their debt quickly or refinanced their loans through a private borrower (both of which I strongly considered at graduation) are completely left out.

Now you might be wondering how this student loan pause differs from the income driven repayment plans that allow many borrowers to have a significantly reduced payment already, in terms of the economic impact and moral hazard. The key difference with the income driven repayment plans is that they are need-based plans, instead of a blanket benefit given to everyone regardless of their income. Under this student loan pause, someone with a $600,000/year income with $100,000 in student loan debt receives the same benefit as someone making $30,000/year with $100,000 in student loan debt, although one can much better afford the payment than the other. This is not the case with the income driven repayment programs.

The Future of the Student Loan Pause

Although no one knows for certain if the pause will be extended again after August, and if so, for how long, but I’m going to speculate. The end of August is right before the midterm elections, which I think will play a key role. Much of the continued extensions of the pause so far has been politically motivated, so I don’t see any reason why the next extension wouldn’t be as well. Reinstating student loan payments for 43 million voters directly before an election would be impactful to say the least, and will likely affect the decision-making of politicians.

For this reason, I think it’s most likely that the pause will be extended again through the end of the year. At that point it will have been over 2.5 years since the majority of federal borrowers last made a payment on their student loans. By then, reinstating the payments will not only be politically unpalatable but also potentially economically hazardous. Why? Well, although some borrowers have been responsible during the pause by continuing to pay on their student loans, or by saving or investing their extra money, many have instead inflated their lifestyles with the extra money they’ve had each month. Additionally, many borrowers are also feeling the effects of increasing inflation while their wages stay stagnant year over year. Lifestyle inflation combined with regular inflation of goods and services is a recipe for mass defaults when student loan repayment resumes. Lastly, as highlighted above, the student loan pause is adding a lot of demand into the economy currently. With the Federal Reserve tightening monetary policy currently, to try to rein in inflation, causing the economy to slow already and with all other fiscal stimulus removed, suddenly pulling that excess demand out of the economy would likely mean a drop in GDP and resulting recession.

In short, by extending the student loan pause this long and likely extending it again after August, the government has put themselves in a tricky position: restart repayment and anger a large number of voters, risk lots of defaults, and potentially a recession… or keep kicking the can down the road by extending the pause “until economic conditions improve,” while worsening the wealth divide between the college educated and non-college educated. When politicians have the option to avoid discomfort and kick the can, they usually do. We’ll see if it happens again.

Although I’ve benefitted significantly from this pause financially over the last two years, I can’t help but hope that repayment actually does start back in August and that the economic repercussions are minimal, because it’s evident that the longer the pause goes on, the harder it will be to resume payments and the more issues there will be in the future.

-Jared Casazza, PT, DPT