The Student Loan Pause Has Made Borrowers Worse Off

The over three-year-long moratorium on federal student-loan repayment has long been hailed as a godsend for student loan borrowers. While announcing yet another extension of the moratorium in December 2021, President Biden praised it as "badly needed breathing room during the economic upheaval caused by the global COVID-19 pandemic."

However, a new working paper from the National Bureau of Economic Research indicates that borrowers whose loans were frozen by the moratorium actually ended up in a worse position than they started in—and have even accrued more student loan debt.

In March 2020, the Trump administration announced a moratorium on federal student loan payments for 60 days, citing the financial hardship faced by borrowers in the early days of the pandemic. In the three years since, the pause has been extended eight times with a variety of legal justifications. Payments are still currently paused, though the recently signed debt ceiling bill sets a hard expiration date for the moratorium on August 30.

The total cost of the pause is estimated to be as high as $5 billion per month, or almost $200 billion by the time repayment starts in September. And all that spending might not have even helped those whom the moratorium was supposed to benefit. According to the paper, those whose loans were frozen by the moratorium actually took on more debt—borrowing more on credit cards and mortgages and even accruing more student loan debt rather than working to pay off other debt they owe. 

The paper compared those whose student loans were frozen by the moratorium because their loans were held federally to those whose student loans were not frozen because their loans were private. There were stark differences between the two groups. For those whose loan payments were paused, they did reap some benefits, like increased credit scores and a decrease in delinquency on student loan debt. However, by other metrics, they actually became worse off. By the end of 2021, borrowers who saw their student loan payments paused increased their credit card, mortgage, and car-loan debt by $1,800 on average and even took on an additional $1,500 in student loan debt compared to those whose loan payments were not paused by the moratorium. Rather than being the "badly needed breathing room" that Biden suggested, the student loan payment pause has actually resulted in borrowers ending up financially worse off than they were before.

"Perhaps paradoxically, temporary student debt relief leads to higher overall household debt levels and larger future debt burdens," the paper reads. "The results indicate that debt payment pauses can increase consumption in the short term, but that overall debt increases, as borrowers use increased liquidity to service new debt."

Not only did the student loan payment pause cost taxpayers billions, but it also didn't even help decrease the debt owed by those whom the pause was supposed to benefit. Like many expensive government interventions, the student loan moratorium made everyone—including those the program was meant to help—worse off.