RESOLVING THE LEDGER
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0 Share Newsweek is a Trust Project member See more of our trusted coverage when you search. Prefer Newsweek on Google to see more of our trusted coverage when you search. Millions of Americans who hoped for student loan forgiveness under former President Joe Biden may have ended up worse off financially, according to a new report.
After waiting for debt relief that never arrived, borrowers experienced financial damage that could exceed 43 percent of a borrower's original loan balance in some cases, according to new research from the National Bureau of Economic Research (NBER).
The study found that borrowers who expected their loans to be forgiven, or believed pandemic-era payment pauses would continue, reduced their monthly student loan payments and increased spending. Subsequently, they became more likely to fall behind on their debt once payments resumed.
“For some borrowers, these programs created a false sense of security,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek . “Many believed a significant portion, or all, of their student loans would eventually be forgiven, allowing them to spend money that otherwise would have gone toward repayment.”
Federal student loan borrowers across the country continue to struggle with repayment after the end of the COVID-era payment pause and the legal setbacks that blocked Biden's debt relief.
More than 40 million Americans hold federal student loan debt, and delinquency rates have risen since payments resumed.
Part of this is because the uncertainty surrounding government promises and repayment policies influenced borrower behavior, often leading to worse financial circumstances as a result.
The NBER report looked at how borrowers responded to expectations about future debt relief. This was based on survey responses as well as credit bureau data and employment records.
Borrowers who were optimistic that loan forgiveness would be approved reduced their student loan payments by about $40 per month on average while increasing non-durable spending by roughly $100 per month.
Similarly, borrowers who expected additional extensions of the federal student loan payment pause also reduced their payments by about $40 per month. After repayments resumed, those borrowers were 7.5 percentage points more likely to become seriously delinquent on their loans.
“The research doesn’t suggest that loan forgiveness itself harmed borrowers, but rather indicates that extended uncertainty surrounding the Biden administration’s forgiveness initiatives and the SAVE plan changed how many people managed their finances,” Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek .
“Some borrowers delayed making payments or increased spending because they believed a portion of their debt might ultimately be forgiven, but when the courts blocked parts of the plan, they were left with larger balances.”
The researchers concluded that incorrect beliefs about future government policy created measurable financial harm, and the losses from these behaviors could exceed 43 percent of the borrower's initial student loan balance.
"There are very real costs for consumers of politicians flip-flopping," Constantine Yannelis, an economist at the University of Cambridge and one of the paper's co-authors, told Fortune. "If consumers take actions based on beliefs that are not actually true because of mistaken policy promises, they may engage in financial planning that actually turns out not to be in their best interest."
Not everyone is on board with the narrative that Biden’s student loan proposals caused harm to borrowers.
Biden's student debt initiatives did provide some relief to millions of borrowers through targeted programs, including Public Service Loan Forgiveness reforms and income-driven repayment adjustments.
The debt relief initiatives came at a time when borrowers were hurting to cover basics.
"The study implies that borrowers went wild on spending, but in reality, many borrowers were, and continue to be, squeezed by post-Covid inflation," Drew Powers, the founder of Illinois-based Powers Financial Group, told Newsweek . "The increase in spending was directly attributed to non-durable goods, the most common of which are food, household goods, and gasoline. In other words, the items inflation has had a huge effect upon."
Biden announced a broad student loan forgiveness initiative in August 2022 that would have canceled up to $10,000 in federal student debt for many borrowers and up to $20,000 for Pell Grant recipients.
Biden’s changes to student loans caused many to expect full debt cancellation before the plan was ultimately struck down by the U.S. Supreme Court in June 2023. According to the NBER researchers, however, many borrowers made financial decisions based on the belief that relief would eventually arrive.
“Borrowers changed their spending behavior. Money that once went toward student loan payments was redirected to what economists call non-discretionary spending; essential expenses such as housing, groceries, utilities, etc,” Thompson said. “As those costs became part of their monthly budget, restarting loan payments became much more difficult.”
At the same time, the federal student loan payment pause, first introduced in March 2020, was extended multiple times by both the Trump and Biden administrations. Several extensions were described as final, only to be prolonged further, adding additional uncertainty about when borrowers would need to resume payments.
The federal government, led by Trump’s Department of Education, is moving forward with collections activities on defaulted student loans.
Millions of borrowers remain behind on their student loans, and delinquency and default rates could very likely continue to rise.
“Many borrowers will likely face higher monthly payments than they anticipated, while others may struggle to resume repayment after yea...
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