“student Loan Transparency: Improving Borrower Awareness And Understanding” – Much has changed since March 2020, when executive and Congressional action paused payments on most federal student loans. The national unemployment rate rose to 14.7 percent in April 2020, but fell sharply and remained below 4 percent as of December 2021. Meanwhile, inflation climbed from an average of 1.2 percent in 2020 to 9.1 percent in June 2022 — the biggest jump in 40 years. .
However, after nine extensions, the student loan payment freeze remains in place at an estimated direct cost of $5 billion per month. The Biden Administration also moved to end some repayments altogether, forgiving hundreds of billions of dollars in federal student loans. Whether the forgiveness program is legal, and whether millions of Americans will have to repay their student loans in full, is now before the US Supreme Court. Jurors will hear the case on February 28.
“student Loan Transparency: Improving Borrower Awareness And Understanding”
These two policies may be linked to each other in court, but they have strikingly different distributional effects. While the White House claims that nearly 90 percent of the relief provided under the amnesty plan would go to families with incomes below $75,000, the pay break provided more than 65 percent of the relief to families with incomes greater than $75,000. In fact, the top 20 percent of households receive nearly 30 percent of the benefit while only accounting for 16 percent of families with federal student debt.
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We look at household student loan payments, as well as income, to determine the relative effects of the payment break program on lower and higher income Americans. Our analysis shows that the overall pause on federal student loan payments disproportionately benefits the wealthiest borrowers. Continuing the payment break without means testing its benefits leads to ballooning costs for taxpayers.
However, in the absence of any payment assistance, approximately 12 percent of families, who are disproportionately low- and moderate-income, have payment-to-income ratios greater than conventional metrics for excessive student debt burden. If both the payment break and the promise of partial loan forgiveness end with an adverse ruling by the Supreme Court in early 2023, these borrowers risk significant negative financial impacts.
The reliance on the payment break may have made other avenues of relief, including relief under Income Repayment plans and the Fresh Start program, less salient for the most vulnerable borrowers. However, these more stable pathways represent the best way to help borrowers most in need of government support. Encouraging families to pursue these options now, while the break is still in effect, is an important safeguard for borrowers’ longer-term financial health.
Various government sources and independent political organizations have provided cost estimates to the student loan payment break. Reconciling these estimates requires an articulation of the impact of the payment break on the federal budget along with other economic indicators.
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Available government measures recorded the break on financial statements as “loan modifications”, which is essentially the cost of tolerance with zero interest accrual. The U.S. Department of Education estimated these costs at $41.9 billion for Fiscal Year 2020 and $53.1 billion for Fiscal Year 2021. The total unrestricted appropriations provided in Fiscal Year 2020 and Fiscal Year 2021 for student loan delinquencies were 98.4 billions of dollars. The Congressional Budget Office estimated the cost of the payment break at $112.8 billion from March 2020 to May 2022. A subsequent letter from the office projected that the 4-month extension of relief from August 2022 to December 2022 will cost an additional $20 billion.
In July 2022, the Government Accountability Office analyzed data from the Department of Education and found that costs associated with the relief between March 2020 and April 2022 totaled $102 billion. This analysis, which does not include extensions beyond August 2022, only measures costs associated with the Direct Loan program and likely underestimates the total cost of the break.
Analysts in the private sector also considered factors beyond the direct cost of lost interest payments. In August 2022, the Committee for a Responsible Federal Budget (CRFB), a private think tank focused on fiscal policy, estimated the total cost of the pause until the end of 2022 to be $155 billion. With the extension announced in November, the organization presented the cost of the extension of the payment break until August 2023 as generating a cumulative political cost of $195 billion. Broadly, the analysis claims that the pause in collections on loans, interest and defaults costs $5 billion per month, which is broadly in line with estimates from the Congressional Budget Office.
While government analyzes focused more exclusively on the accounting costs of the policy, CFRB also identified the inflationary implications of the pause. First, inflation generates a cost in the erosion of the value of future payments to the government; for individual debt holders, this cost is a “benefit” in the form of reductions in the real value of future payments. Second, because borrowers have more cash for consumption, the student loan break is likely to increase inflation, with the organization estimating an impact of about 20 basis points per year. Indeed, this inflationary effect was acknowledged by the Biden White House, as the member of the Council of Economic Advisers Jared Bernstein claimed that the resumption of student loan payments would offset any inflationary effect of debt forgiveness.
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One final component of “cost” that most analyzes do not consider is the payments that will be waived for borrowers receiving Public Service Loan Forgiveness and Income-Driven Repayment forgiveness. For borrowers covered by these programs, the months of forbearance during the payment break (34 so far) are included as part of the repayment. Thus, a worker covered by the public service program that forgives loan balances after 120 qualifying months of payments would need only 86 additional qualifying payments to qualify for full loan assistance. Although it is difficult to provide a full accounting of the potential “costs” of these lost payments to the government, they are not distributionally neutral because those borrowers who forgo relatively large payments or would have paid off their loans before forgiveness are the biggest beneficiaries.
The benefits of the payment break are directly related to the balances, monthly payments and the interest rates of the loans. Each of these components contributes to the net regressive effect of the pay-pause continuance.
Interest rates on federal student loans vary based on the borrower’s education level and the type of loan, effectively representing the current benefit per dollar borrowed. To illustrate, for 2022, the interest rate for undergraduate borrowers is 4.99 percent, while graduates face a rate of 6.54 percent. Through the PLUS program, graduate and professional students who borrow beyond the basic limit and parents borrow at 7.54 percent interest. Thus, for every dollar borrowed, PLUS borrowers get the most “benefit” from the break.
Using data from the 2019 Survey of Consumer Finances, we organize households with federal student debt (our sample of “borrowers”) by family income decile to estimate the distribution of student loan payments and balances. While the impact of borrowing is broadly concentrated in the middle of the distribution (about 71 percent in the middle 60 percent of the distribution), both payments and balances are concentrated in the upper part of the income distribution (see Figure 1). Borrowers in the top four deciles, with approximate family incomes greater than $80,000, account for about 47.4 percent of student loan balances and about 60 percent of student loan payments, but only 41.4 percent of households with federal student debt. The greater concentration of student loan payments (relative to balances) in the top deciles reflects the fact that borrowers at lower deciles are more likely to be in arrears or enrolled in income-based repayment.
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We also see an upward march of average loan payments across the income distribution, showing that higher income households see the largest increases in cash and interest subsidies from the payment break (see Figure 2). In addition, the erosion of the real value of future liabilities with high inflation (4.7 percent in 2021 and 8.0 percent in 2022) disproportionately benefits high-balance borrowers, who are likely to be in the top deciles of the income distribution.
The payment-income patterns we observe have also been documented in administrative bank data linked to credit reports. Research published by the JPMorgan Chase Institute, for example, examines an extraordinarily rich dataset involving 301,000 people. It shows that for borrowers earning about $30,000 a year, the average monthly payment is about $134 and the 90th percentile payment about $419; for borrowers making about $130,000 a year, the average monthly payment is about $225 and the 90th percentile payment about $813.
Even as payments and loan balances, along with interest premiums, are skewed toward the top of the income distribution, the question of how the “burden” of student loans is measured relative to income deserves investigation. We therefore also plot the means of student loan payment to income ratios by household earnings decile.
Average pay-to-income ratios generally decrease with income and range from about 1.8 percent in the top decile to
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