The Biden administration has announced yet another extension of the moratorium on federal student loan payments to May 1, 2022, this time citing the Omicron variant as its reason. The moratorium was originally slated to expire on February 1, and despite several previous extensions the administration had described the February 1 deadline as “final.” It should have stayed that way.
The moratorium costs taxpayers $52 billion per year, twice what the federal government spends on grant aid for low-income students. In addition to lost interest (rates are set at 0% during the moratorium), months while payments are paused also count towards the requirements for Public Service Loan Forgiveness and other debt-relief programs. This means millions of borrowers will enjoy the benefits of loan cancelation without actually making many of their payments.
Pausing student loan payments is one of the most poorly-targeted economic relief programs that policymakers have dreamed up. Before the pandemic, the top 40% of earners made nearly three-quarters of student loan payments every year, as high-income people tend to have the biggest debts. The bottom quintile accounted for just 2% of overall payments, meaning the nation’s poorest households receive just 2% of the immediate cash benefits of the payment pause.
By March, loan payments will have been paused for two full years. The Biden administration and the payment moratorium’s cheerleaders in Congress seem to think that pausing student loan payments is the answer to any economic or social disruption. (It’s also a way to score political points. The Department of Education’s press releaseextending the pause brags about saving borrowers $5 billion per month and explicitly links the extension to the administration’s other loan-forgiveness initiatives.)
We cannot allow payment moratoria to become a precedent. If current patterns persist, future administrations may decide to pause student loan payments in response to the slightest whiff of economic headwinds. Never mind that people with student debt, who mostly have college degrees, are likely to be the most insulated from future recessions.
A more targeted approach is needed. Fortunately, the federal student loan system already has a robust safety net. Deferments for unemployment and financial hardship are available, as are repayment plans that link payments to income. As we’ve written here at FREOPP, there are plenty of ways this system could be improved. But it’s simply not necessary to universally pause payments when so many cheaper, better-targeted options already exist.
The challenge is ensuring that borrowers can access those options quickly when financial troubles loom. Targeted outreach to borrowers who are statistically at higher risk of loan delinquency is critical. One idea might be to link data systems at the Departments of Education and Labor to automatically contact borrowers regarding income-driven repayment plans when they file an application for unemployment benefits.
There are bolder reform ideas as well. In lieu of the current system of loan servicers and collections agencies, the federal government could collect federal student loan payments through the tax and withholding system and directly tie payments to income. Australia and the United Kingdom collect their student loans this way. Jason Delisle of the Urban Institute has proposed a framework for how such a system could work here. The advantages are clear: if a borrower’s paychecks stop, so will her payments. But payments will continue for borrowers who keep their jobs through the recession. The plan would save taxpayers tens of billions of dollars relative to the status quo, which is stopping payments for everyone.
The student loan payment moratorium should have ended in the summer of 2020. But politics and bureaucratic inertia have conspired to extend it long past its necessity. There is a serious risk that costly moratoria will become a permanent fixture of U.S. student loan policy. The need for better solutions is urgent.