COVID-19-era policies regarding student loan debt are quickly ending. The Supreme Court of the United States is expected to rule on Biden’s student loan forgiveness plan this week. The White House said that student loan payments would restart in 60 days after a Supreme Court decision on the plan or June 30, 2023, whichever comes first. The debt ceiling deal passed by Congress has a provision that would prevent the Education Department from extending the student loan payment pause once more after August 30, 2023. 

While many worry that the end of the student loan payment pause will negatively affect borrowers, a new working paper by the National Bureau of Economic Research (NBER) found that the pause in student loan payments actually increased debt. 

At the end of March 2020 in response to the COVID-19 pandemic, the federal government issued a temporary pause of federal student loan payments for many borrowers. The pause was extended multiple times to June 30, 2023. In August 2022, the White House issued an executive order announcing student loan forgiveness.     

With student loan debt being the second largest source of household debt in the country in 2020, these efforts were expected to provide great relief for families. The NBER paper particularly studied the effect of the payment pause, finding that most households did not use the relief from the pause to pay off debt; they increased it. 

NBER observed a stimulus effect from the 2020 student debt moratorium, “as borrowers substitute increased private debt for paused public debt.” While credit scores increased and delinquencies dropped for borrowers who benefited from the pause, borrowing on credit cards, mortgages, and auto loans also increased, compared to borrowers who did not benefit from the pause because their loans were private. 

In fact, household leverage (ratio of debt to personal disposable income), apart from student loans, increased by $1,200 (3%) for households who benefited from the pause. Individuals with a student loan payment pause now owe an additional $1,800 in other debt and pay an additional $20 monthly. By the end of 2021, borrowers subject to the pause had an additional $1,500 in student loan debt compared to those whose loan payments were not frozen. In the long term, the student loan pause led to higher overall household leverage. 

As economist Alex Tabarrok notes about the effects of the pause, “This is good news for debt pauses as stimulus payments but it’s bad news if you think that debt pauses are just the nudge some people need to get their financial house in order.” 

The study observed two other interesting findings. Increased consumption through borrowing was concentrated among borrowers without prior delinquencies, whose credit scores largely stay the same. The announcement of student loan forgiveness resulted in few changes in borrowing for those affected compared to those unaffected.    

These findings all suggest a relationship between liquidity and credit: “Liquidity increases the demand for credit.” The rise in household leverage was largely not because of a rise in credit score or hope of future student loan forgiveness, but because of increased liquidity. NBER conjectures that the liquidity was used for making down payments or making first-due monthly payments. 

In summary, the study found that in the short term, a pause on student loan payments can increase consumption, and disturbingly in the long term, overall debt increases. Not only did the borrowers affected not pay off student loan debt, but they also used their new liquidity to increase their debt burden in other areas.