Assessing the Economic Impact of Student Debt Freezes

August 21, 2023 • By The UCI Paul Merage School of Business

In 2020 the massive economic disruption caused by the COVID-19 pandemic prompted governments to take drastic measures to provide financial relief for households and businesses. One of those measures included a pause on student loans, temporarily suspending the repayment requirements for millions of borrowers.

While this policy was intended to stimulate the economy and relieve financial stress, little is known about the impact of the payment pause on the labor market or on the financial outcomes of those borrowers. A recent study by Ben Lourie the The UCI Paul Merage School of Business, Alexander Nekrasov of the University of Illinois Chicago, and Il Sun Yoo of the University of Hawaii at Manoa explores how loan suspension policies influenced the workforce. Their paper, “The Impact of Debt Forbearance on Borrowers’ Financial Behavior and Labor Outcomes: Evidence from Student Loans,” is forthcoming in Finance Research Letters.

Health Check

Lourie and his co-authors wanted to see how the pause in repayments impacted individuals. “We were especially curious about how the pause would impact personal consumption habits,” Lourie says. “We wanted to measure financial health. Do people have fewer overdrafts? Do they start investing more, or do they spend more now that they’re not paying on their loans? These are the questions we wanted to find answers to.”

Granular Data

To find answers, Lourie and his team used data from a leading analytical company. “The data sample we used included 824,524 borrowers’ quarterly observations,” he says. “We narrowed it down to the two quarters before and after the launch of the forbearance program.”

Lourie, Nekrasov, and Yoo analyzed data from a large number of financial institutions. The data included information about the bank accounts and credit cards of a large number of individuals. “Our data didn’t include personal details,” says Lourie, “so we didn’t know who the person was, but we did have very detailed information about their bank accounts and credit card transactions. With this banking data, we can see how much people are consuming, whether they’re getting overdraft fees, sending money to a broker, or investing more money. We also could see whether individuals were receiving direct deposit for wages, and most importantly for our research, whether someone is paying, or not paying, their student loans.”

More Money

What did these individual borrowers do with their extra money? Did they invest more? Did they spend more? Did they improve their financial situation, or did things get worse? “As expected, we found an increase in consumption for those who didn’t pay their student loans during the pause. Since they had more money, they were also less likely to overdraft on their accounts. We also found that they sent more money to their brokerage accounts. They invested more. That’s to be expected, right? If I have more money, I’m probably going to use it.”

Unintended Outcomes

There was one unexpected result in their study, however, one they didn’t see coming. “What was unexpected was the realization that this relief in financial pressure also caused people to work less,” Lourie says. “What we found was their wages overall began to reduce. It’s not that they stopped working. They just worked fewer hours because their student loan payments were no longer a pressing concern. It seems that those who worked two jobs dropped down to one job. Those who worked longer hours started working fewer hours. Essentially people shifted to a more healthy work/life balance.”

Negative Impact

In light of their findings, companies should think about what it means for the workforce once the student loan pause ends. As Lourie elaborates: “Some people will say it’s a good thing that employees are working more hours, but that’s not necessarily true. Some may end up working too much, or even working themselves to death, as the saying goes. This could lead to negative mental and physical health outcomes for some people. For others, they may decide they need to wait even longer before starting a family or buying a home.”

Unknown Consequences

Lourie and his colleagues recommend further research should be conducted to determine the effects of student loan policies across other subgroups of borrowers, specifically those with varying levels of income, debt, and education. “Our study doesn’t measure those types of factors, but there are known consequences for working too much. It gives us a lot to consider now that the payment pause is coming to an end.”