A great deal has changed since March 2020, when executive and Congressional action paused payments on most federal student loans. The national unemployment rate spiked at 14.7 percent in April 2020, but receded dramatically and has stayed below 4 percent since December of 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.
Yet, following nine extensions, the payment pause on student loans remains in place at an approximate direct cost of $5 billion per month. The Biden Administration also has moved to end some repayments altogether, by 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 back in full, is now before the U.S. Supreme Court. Justices will hear the case on February 28.
These two policies may be tethered to one another in court, but they have strikingly different distributional impacts. While the White House claims that nearly 90 percent of the relief provided under the forgiveness plan would go to families with incomes less than $75,000, the payment pause has 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.
We look at the household student loan balances, payments, as well as earnings, to determine the relative impacts of the payment pause program on lower- and higher-income Americans. Our analysis shows the across-the-board pause on federal student loan payments disproportionately benefits the most affluent borrowers. Continuing the payment pause without means-testing its benefits leads to ballooning costs for taxpayers.
Still, in the absence of some payment relief, approximately 12 percent of families, who disproportionately have low and moderate incomes, have payment-to-income ratios greater than conventional metrics for excessive student debt burden. If both the payment pause and promise of partial loan forgiveness end with an adverse Supreme Court ruling in early 2023, these borrowers are at risk of significant negative financial impacts.
The reliance on the payment pause may have made other avenues of relief, including relief under Income-Driven Repayment plans and the Fresh Start program, less salient for the most vulnerable borrowers. Yet these more stable avenues represent the best way to assist borrowers most in need of government support. Encouraging families to seek out these options now, while the pause is still in effect, is an important safeguard for borrowers’ longer-term financial health.
How Much does the Student Loan Payment Pause Cost?
Various government sources and independent policy organizations have provided cost estimates of the student loan payment pause. Reconciling these estimates requires articulation of the impact of the payment pause on the federal budget along with other economic indicators.
Available government measures have recorded the pause on financial statements as “loan modifications,” which is essentially the cost of forbearance with zero interest accrual. The U.S. Department of Education has calculated these costs at $41.9 billion for Fiscal Year 2020 and $53.1 billion for Fiscal Year 2021. The total indefinite appropriations provided in Fiscal Year 2020 and Fiscal Year 2021 for student loan payment deferrals was $98.4 billion. The Congressional Budget Office estimated the cost of the payment pause 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 would 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 emergency 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 payment pause.
Analysts in the private sector also have 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 through 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 pause until August 2023 as generating a cumulative policy cost of $195 billion. Broadly, the analysis asserts that the pause of collections on loans, interest, and defaults costs $5 billion per month, which is generally consistent with estimates from the Congressional Budget Office.
While government analyses 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, as borrowers have more cash-on-hand for consumption, it is likely that the student loan pause increases inflation, with the organization estimating an effect of about 20 basis points per year. Indeed, this inflation impact was acknowledged by the Biden White House, as Council of Economic Advisors member Jared Bernstein claimed that the restarting of student loan payments would offset any inflationary impact of debt forgiveness.
One final component of “cost” that most analyses do not consider is the payments that will be foregone 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 pause (34 to date) are included as part of the repayment count. Thus, a worker covered by the public service program, which forgives loan balances after 120 qualifying months of payments, would need only 86 additional qualifying payments to qualify for full loan relief. While it is difficult to provide a full accounting of the eventual “costs” of these forgone payments to the government, they are not distributionally neutral because those borrowers who forego relatively large payments or would have paid off their loans before forgiveness are the largest beneficiaries.
Distributional Evidence
The benefits of the payment pause tie directly to the balances, monthly payments, and the interest rate on the loans. Each of these components contributes to the net regressive impact of the payment pause continuation.
Interest rates on federal student loans vary based on the education level of the borrower 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 graduate borrowers 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 each dollar borrowed, PLUS borrowers receive the greatest “benefit” from the pause.
Using data from the 2019 Survey of Consumer Finances, we organize households with federal student debt (our sample of ”borrowers”) by decile of family income to estimate the distribution of student loan payments and balances. While the incidence of borrowing is broadly concentrated in the middle of distribution (about 71 percent in the middle 60 percent of the distribution), both payments and balances are concentrated in the top part of the income distribution (see Figure 1). Borrowers in the top four deciles, with approximately 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 deferment or enrolled in income-based repayment.
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