The Repayment Pause and the Continuing Crisis of Non-Repayment

Part 12 in our Millennial Student Debt series.

An overview of this report

In 2020 we published a report showing that a major contributor to the run-up in outstanding student debt over the preceding 15 years was the decreasing share of loans, and of borrowers, who ever make progress toward repayment. Even as the federal government issues 100-plus billion dollars of new student loans every year, the share of old student loans that are paid off has diminished significantly, especially after the mid-2010s when the Education Department expanded Income-Driven Repayment plans that offer relief from repayment for the highest-balance borrowers. This new report analyzes what happened to student loan repayment in the two and a half years since our last report, during which repayment of federal student loans was formally paused thanks to the pandemic repayment moratorium. 

• We find that most beneficiaries of the pause were borrowers who otherwise would have seen their balances increase rather than decline in the absence of the pause. 
• That pattern is egalitarian on the dimensions of race and gender: female and minority borrowers were the most likely to see increasing rather than decreasing balances in the absence of the pause; hence, they disproportionately benefited by lifting the weight of those mandatory payments. 
• We show that for a constant sample of student borrowers who’ve had outstanding student debt since at least 2009, the pause improved their financial wellbeing, including a significantly higher probability of first-time home-buying, a reduction in delinquencies, and an improvement in credit scores.
• Our single most striking finding is that the repayment pause actually resulted in the highest student loan balances decreasing for the first time ever, most likely due to the fact that interest rates were set to zero, enabling those high-balance borrowers to make progress paying off principal. 
• Altogether, there was little repayment going on before the pause was put in place, especially for high-balance borrowers; while it was in effect, those borrowers made more progress toward repayment than ever before.

The implication of all of these findings is that turning the apparatus of loan repayment back on, as the Fiscal Responsibility Act (signed in June 2023) mandates, will reverse the gains made while the pause was in effect: balances that were temporarily declining will once again increase, as they did prior to 2020. The administration has proposed a new Income-Driven Repayment plan that ostensibly cancels unpaid interest in real time, but that is not as generous as the repayment pause, and it is far more administratively burdensome. The idea that borrowers will transition smoothly from the repayment pause to enrollment in the new IDR plan is far easier said than done. A much more likely outcome is once the pause is rescinded, borrowers fall through the cracks and un-repayable balances once again accumulate, which (depending on the circumstances) can lead to delinquency and default. That outcome will be exacerbated if the Supreme Court strikes down administrative student debt cancellation under the administration’s preferred HEROES Act authority.

The upshot of all of this is that whatever the legal status of cancellation, the repayment pause, or IDR, much of outstanding federal student loan balances aren’t ever going to be repaid. What the federal government considers an asset on its balance sheet (outstanding student loans) is worth less than currently valued, perhaps far less. The government is poised to take a bath on its student loan portfolio over the long term, even as that portfolio expands in size every year as the higher education system sucks up more federal funding. That dynamic is likely to get worse if the more generous IDR plans are enacted, because universities can truthfully tell would-be students that the debt never really needs to be repaid, supporting higher tuition and increased labor market credentialization. While policy-makers want the higher education finance system to “go back to normal,” ‘normal’ is high and rising balances with no reasonable prospect of eventual repayment.