In her Washington Post column Megan McArdle remarks on a study of what happened during the student loan payment moratoria:
A working paper out of the Becker Friedman Institute for Research in Economics by economists Michael Dinerstein, Constantine Yannelis and Ching-Tse Chen compares what happened in households that had loans eligible for the moratorium with those whose loans were privately held, and thus outside the emergency pause.
Some of the effects were unsurprising: People who didn’t have to make payments had more disposable income and fewer delinquencies on student loan debt; as a result, their credit scores were on average somewhat higher. They also, of course, ended up with higher student loan balances — around $1,500 worth — because unlike their counterparts with private loans, they weren’t making payments to reduce the principal.
Somewhat more surprisingly, the pause on student loan payments didn’t do much for delinquencies on other kinds of debt — people whose loans were on hold mostly don’t seem to have used the breathing room to get caught up on their credit cards or mortgage payments. Rather the opposite, in fact: Mortgage, auto and credit card debt all rose by an average of $1,200. Overall, household indebtedness not only didn’t improve for those who benefited from the pause, but deteriorated to the tune of almost $2,700.
Now that isn’t what I would have done. I would have used the available cash to pay off other debts but I hate debt. It’s the way I was brought up. We live below our means.
Ms. McArdle continues:
A few takeaways follow from this. First, while we often talk about a policy working, or say it doesn’t work, reality is more complicated: Policies can work on one dimension and fail on another. Pausing student loan payments can boost the economy, quickly, by keeping people spending. On the other hand, if you think of student loan relief as a way to help upwardly mobile households build generational wealth, these results are much less encouraging.
A second observation is that it’s hard to get people to save more. Yes, we managed during the pandemic by firehosing money into bank accounts at a time when there was a lot less to spend it on — but as things began reopening, the personal savings rate dropped to well below its pre-pandemic average. And in more normal times, policymakers struggle to raise savings appreciably — economists are still debating whether tax-advantaged savings accounts such as 401(k)s, one of the most popular savings programs of all time, actually increase the savings rate.
Which brings us to the third and most important lesson, or rather, a reminder: While people do respond to incentives, they often respond somewhat unexpectedly.
I certainly wouldn’t have expected it.
Something we should keep in mind is that saving is a perverse sort of behavior. You are delaying present gratification for later gratification or in case of urgent need. Unlike spending saving has no immediate reward. Both living beyond your means and saving are habits and saving is a much harder habit to acquire.
“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.†— Charles Dickens, David Copperfield
I am sure some portion needed the money to survive, but in most places, that need ended long ago.
The reality is that student loan forgiveness means more potential borrowers, and with the government pushing housing again, it will be “a recipe for disaster”.
As the song says, “Why Worry? Be Happy.”
“Both living beyond your means and saving are habits and saving is a much harder habit to acquire.”
Perhaps it might be better said that it is a discipline that in part has eroded over generations, with politicians willing to transfer income from responsible people to irresponsible people (and that’s not by chance) and an erosion of personal responsibility.
Also, the behavior of these young people is probably better described as consistent with Modigliani’s lifetime cycle theory combined with the comment above.
I graduated from business school with a negative financial net worth of $7K. On a credit card. I quickly paid it down and have not run a monthly credit balance, other than a mortgage, since. That of course is personal preference, IMHO shared by more people than one might think. But the profligates certainly do exist, and are growing in number, and shouldn’t be subsidized.
There’s 3 different levels with regards to debt
The easiest is to spend until one literally cannot — because of credit limits.
Next level is pay off all debts as fast as one can.
The final level is “acquire†debt when the terms make sense. For example; during the period of the student loan pause; mortgage rates fell to 2.8% for 30 year fixed rate. Considering subsequent inflation and nominal wage growth; taking a loan and paying back as slow as possible makes the most sense. Also, car loans were 0% out to 60 months; given the following rise in nominal car prices; the most sensible thing was to take out a car loan. Of course; this is predicated that one is able to afford the nominal payments.
If you look at mortgage loan, car loan outstanding over the past decade; it’s undeniable the cost of money influences behavior.
I dont know if it is worse than it used to be, but I am always surprised how many of my 6 figure employees live paycheck to paycheck. But then their elders live off of Social Security and Medicare and for most of them they receive far more in benefits than they paid in.
Just out of curiosity I did some digging on student loan debt. Stats at link, which seem pretty reasonable. In 2017 there were about $96 billion in student loans. Total loss to the government that year was 0.7%, or about $600 million. In increased during the Trump years, dont know why, to 4.5% or about $4 billion. The big increase was during the pandemic so it hit close to $20 billion due to the pause. This suggests that the very large majority of loans are being repaid and with minor modifications the loan program would be run without a loss. (For profit school loans have a high rate of defaults and they had been limited during the Obama admin and Trump reinstated those IIRC, but doesnt seem likely to be enough to explain the big increase.)
https://thecollegeinvestor.com/39673/does-the-government-profit-off-of-student-loans/#:~:text=The%20answer%20depends%20on%20political,to%20calculate%20the%20subsidy%20rates.
Steve
While not absolute, many people are poor because they spend every dollar they can get. They have little or no conception of “the future”. Actually, they assume “the future” will be the same or better than today, and they buy the most expensive things they can afford.
When money is created through lending, it becomes worse. Many lending institutions use the same principle. They assume “the future” will be the same or better than today, and they lend the most money they can to people who assume “the future” will be the same or better than today.
When the government encourages lending institutions, that assume “the future” will be the same or better than today, to lend the most money they can to people who assume “the future” will be the same or better than today, it becomes even worse.
When the predictable future arrives, the borrowers will be blamed. The lenders will be blamed. The government will be blamed. The actual blame belongs to a monetary/financial system that allows this to occur.
There should be an antagonistic relationship between all parties. There is not. With few exceptions, everybody is pulling in the same direction assuming “the future” will be the same or better than today. It is insanity, but maybe, only the insane can comprehend insanity.
Money is like heroin. It corrupts. Legalizing heroin does not suddenly make a junkie a model citizen. Legalizing money creation through lending does not suddenly make a sound monetary/financial system. Again, it is insanity.
Full Disclosure: I am insane.