Their Student Debt Disappeared, but Their Financial Worries Persist

Millions of borrowers across the country have had all or some of their student loans eliminated by the federal government

By Terell Wright and Melissa Korn of The WSJ. Excerpts:

"Borrowers who were late on payments or even defaulted on their student debt are often still digging out of other financial problems, including with their credit scores or other forms of debt. And since many weren’t making regular student-loan payments, they don’t find themselves with a new stream of cash just because the monthly bill stopped coming. 

“For the typical borrower, the forgiveness is nice but not life-changing,” said Constantine Yannelis, an associate professor of finance at the University of Chicago who studies household finance."

"Economists say it is hard to draw broad conclusions just yet, because borrowers have a range of spending habits and earnings. In addition, the bulk of those who have had their loans forgiven are still new to life without having to make the payments. 

In a July study, Yannelis and others found that borrowers experiencing student-loan forgiveness largely replaced it with other forms of debt. 

Auto-loan borrowing rose by $230, and credit-card borrowing by $220, on average. Home-loan debt also increased, which could boost wealth in the long term. 

The researchers found that borrowers whose debt was forgiven experienced almost no change in their credit scores, likely because they were taking on new loans that countered the benefit of the old ones disappearing. Many also already had a bump when the federal government paused certain student-loan payments during the pandemic, potentially limiting the impact now that their balances are erased."