Federal Student Loan Policy Shifts Linked to Higher Default Rates, Research Finds
New research from the National Bureau of Economic Research suggests that repeated extensions of the federal student loan payment pause and perceived promises of forgiveness influenced borrower behavior. The study indicates that borrowers who expected relief were 7.5 percentage points more likely to be 90 days past due on their loans by May 2025. This financial impact is attributed to borrowers reducing loan payments and increasing discretionary spending based on these expectations.
In August 2022, President Joe Biden announced what was termed a "final" extension of the federal student loan payment pause. However, the pause was subsequently extended multiple times before payments ultimately resumed in October 2023.
New research from the National Bureau of Economic Research (NBER) indicates a financial cost associated with these policy shifts. According to the study, borrowers who anticipated continued relief or forgiveness were 7.5 percentage points more likely to become 90 days past due on their loans by May 2025.
Constantine Yannelis, an economist at the University of Cambridge and a co-author of the paper, highlighted the "very real costs for consumers of politicians flip-flopping." He suggested that consumers making financial plans based on unfulfilled policy promises might act against their own best interest.
Co-authored with Dmitri Koustas and Michael Weber, the paper tracked borrower beliefs about forgiveness between 2022 and mid-2025, correlating survey responses with credit bureau records and consumption data. The findings show that borrowers optimistic about future loan forgiveness reduced their monthly student loan payments by an average of $40 and increased non-durable spending by an average of $100 per month. Many also opted for longer repayment terms in anticipation of relief.
When payments resumed and the expected forgiveness did not materialize, these borrowers reportedly faced an unforeseen financial challenge. Yannelis noted that many who had expected forgiveness ultimately became delinquent on their loans due to a lack of prior planning and other spending commitments. The rate of delinquency reportedly accelerated with each extension of the payment pause.
President Biden's August 2022 executive order, which proposed up to $20,000 in student debt relief for Pell Grant recipients and $10,000 for most other borrowers, was announced months before the midterm elections and later blocked by the Supreme Court in June 2023. By that time, the payment pause had been extended seven times.
(Source: Fortune)
