But the debt pause, let’s recall, was originally framed as a deliberate economic stimulus measure in the face of COVID. The debtors who were allowed to skip what is now three years of payments were implicitly expected to pour the money directly into the economy with immediate consumer purchases rather than retirement of other debt or long-term investments.
“Despite having higher cash on hand, borrowers do not use their additional liquidity to pay down other debt. In fact, household leverage rises as borrowers make higher payments on other loans, and mortgage, auto and credit card debt rise.… The results suggest that the payment pause led to higher durable and non-durable consumption in the short term, but higher overall leverage, consistent with binding liquidity constraints.
Student debtors ended 2022, the authors estimate, with five per cent more household debt than they had at the outset of 2020; half of this was from the increasing balance of the unpaid student loans and half was new borrowing. From the macroeconomic point of view, this is a point in favour of debt moratoriums as an efficient way of addressing an economic shock, since the full balance owing can stay on the government’s books while you give borrowers a temporary break.
You do get a lot of immediate stimulative spending in exchange for a low-cost delay in payments, as opposed to just sending debtors cash. But, as Prof. Tabarrok writes, it does mean that student-loan sufferers may be people “who have difficulty restraining spending regardless of wealth,” and that marginal student-loan relief may not have the salutary stabilizing effects at the household level that are promised by its advocates.
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