{"668952":{"#nid":"668952","#data":{"type":"news","title":"Did Student Loan Forbearance Push Distressed Borrowers Further into Debt?","body":[{"value":"\u003Cp\u003E\u003Cem\u003EThis story originally appeared in \u003Ca href=\u0022https:\/\/insights.som.yale.edu\/insights\/did-student-loan-forbearance-push-distressed-borrowers-further-into-debt\u0022\u003EYale Insights\u003C\/a\u003E on Aug. 7, 2023, and was written by Aimee Levitt.\u003C\/em\u003E\u003C\/p\u003E\r\n\r\n\u003Cp\u003EWhen the COVID-19 pandemic hit in March of 2020, Heather Tookes, a professor of finance at Yale SOM, began to study the impact of various government policy responses to the crisis. With colleague Matt Spiegel, she published two research papers about the effectiveness of various restrictions on businesses such as\u0026nbsp;\u003Ca href=\u0022https:\/\/insights.som.yale.edu\/insights\/did-covid-19-restrictions-on-restaurants-and-bars-save-lives\u0022\u003Erestaurants, bars\u003C\/a\u003E, and\u0026nbsp;\u003Ca href=\u0022https:\/\/insights.som.yale.edu\/insights\/study-shows-which-restrictions-prevent-covid-19-fatalities-and-which-appear-to-make-things\u0022\u003Eretail stores\u003C\/a\u003E.\u003C\/p\u003E\r\n\r\n\u003Cp\u003EAs business restrictions began to lift, Tookes turned her attention to the federal student loan forbearance policies that went into effect in March 2020, pausing student loan payment requirements and lowering the interest rate on these loans to 0%. Originally intended to last just a few months, the program was extended several times and is now scheduled to end on September 1 of this year, with payments resuming in October. If the most vulnerable student loan borrowers did not have obligation to make their student loan payments, she wondered, were they saving more or spending more, and if they were spending more, was it because more credit was suddenly available to them? One of Tookes\u2019s usual research areas is corporate finance, where she has studied the way credit market frictions interact with firms\u2019 financing decisions. But in this case, she and her coauthors examined the credit market with a focus on individual borrowers.\u003C\/p\u003E\r\n\r\n\u003Cp\u003EWith two colleagues from Georgia Institute of Technology, Sudheer Chava and Yafei Zhang, Tookes began digging into the data, which they obtained from one of the major credit bureaus. They looked at borrowers who were already in financial distress before the pandemic, which they defined as anyone with a student loan delinquency in the 24 months leading up to the pandemic. \u201cWe study this group because the goal of the policy was to help the most vulnerable at the onset of the pandemic,\u201d Tookes says. Because the federal student loan forbearance was automatic and applied to all federally held loans, they had a natural control group of people with privately held loans, who generally had to continue paying throughout the pandemic, unless they were able to obtain forbearance from their specific lenders. Many of the privately held student loans were issued under the now defunct Federal Family Educational Loan program at similar terms to the loans issued directly from the government. The research team created a matched sample of student loan borrowers from the two groups where they paired borrowers based on credit scores, zip code, age, gender, income, loan balances, and other debt. And then they followed the numbers to see what happened over the next three years.\u003C\/p\u003E\r\n\r\n\u003Cp\u003EOne of the first things that happened after forbearance went into effect was that the federal borrowers\u2019 credit scores jumped dramatically, an average of nearly 70 points in the first year. The authors attribute 13.4 of those points to the forbearance program. Borrowers in forbearance had delinquency flags, an important factor in credit scores, removed from their credit reports. The lack of student loan payments, combined with broader COVID relief programs, including stimulus checks from the government, meant that some of these distressed borrowers suddenly had some extra money. And now they also had much better credit.\u003C\/p\u003E\r\n\r\n\u003Cp\u003E\u201cOne thing to do would be to try to put any extra money aside in some interest-bearing account until you have to start paying again,\u201d says Tookes. \u201cBut we observed increases in credit card and auto debt. People started spending more, and the increased spending continues.\u201d\u003C\/p\u003E\r\n\r\n\u003Cp\u003EOn average, credit card borrowing increased an extra 12% for the forbearance group. Auto debt increased, too, by an extra 4.6% compared to the control group. The only kind of debt that didn\u2019t increase was mortgage debt. Tookes and her colleagues still aren\u2019t sure why. \u201cOne possibility is that mortgage lenders take into account information that goes far beyond a credit score,\u201d she says. \u201cOr maybe something about the temporary nature of forbearance made them more cautious when lending to these more vulnerable borrowers.\u201d\u003C\/p\u003E\r\n\r\n\u003Cp\u003ETookes stresses that the researchers made no qualitative judgments, positive or negative, about the borrowers taking on more debt or about creditors supplying that debt. Maybe people were finally purchasing items that they had been putting off because student loan payments took up so much of their monthly income.\u003C\/p\u003E\r\n\r\n\u003Cp\u003E\u201cBut what we did next and what is the most concerning part of our analysis,\u201d she says, \u201cwas to look at the delinquencies following forbearance. Delinquencies on credit cards and auto debt are starting to rise at a higher rate for the forbearance group, even before student loan payments resume.\u201d\u003C\/p\u003E\r\n\r\n\u003Cp\u003EThe delinquencies in the non-student loans, Tookes notes, began increasing in the second year of the pandemic, approximately 16 months after forbearance first started. \u201cEven before the requirement to start paying again,\u201d she says, \u201ceven before turning the faucet back on, this group has more credit card debt, more auto debt, and more delinquencies, and now they\u2019re going to have to start paying their student loans.\u201d\u003C\/p\u003E\r\n\r\n\u003Cp\u003EWhat will happen when payments resume in the fall? Tookes says there\u2019s no way to know for certain, but there may be a hint in the data from the control group. Some of those borrowers did request and receive shorter periods of forbearance from their private lenders at the start of the pandemic. But 10 to 12 months later the data show an uptick in the fraction of student loans that are more than 90 days past due, which may indicate that they had to start paying again and were unable to do so.\u003C\/p\u003E\r\n\r\n\u003Cp\u003E\u201cDoes this all mean that student loan forbearance at the onset of the pandemic was unhelpful?\u201d she asks rhetorically. \u201cI don\u2019t think so. I think in the beginning there was a lot of uncertainty. We didn\u2019t know what was happening and people were not working. The better question is whether extended forbearance, where all borrowers with federally held student loans were automatically enrolled into the program for more than three years, was helpful.\u201d\u003C\/p\u003E\r\n\r\n\u003Cp\u003ETookes plans to continue studying the data even after the forbearance period ends. Given her interest in the supply side of credit markets, she\u2019s most interested in why the credit card companies and auto lenders were so willing\u2014and are still so willing\u2014to provide funds to borrowers whose credit reports suggested that their scores had improved due to a temporary program, rather than a shift in permanent financial health.\u003C\/p\u003E\r\n\r\n\u003Cp\u003E\u201cWe want to make sure we understand the role that policies can have in creating a situation of extra distress\u201d she says.\u003C\/p\u003E\r\n","summary":"","format":"limited_html"}],"field_subtitle":"","field_summary":[{"value":"\u003Cp\u003EA temporary pause on federal student loan payments, dating to the first months of the COVID-19 pandemic, is set to end in September. In a new study, Yale SOM\u2019s Heather Tookes and her co-authors study the impact of this long-lasting debt relief program on distressed borrowers. They find that after the loan forbearance went into effect, distressed borrowers\u2019 credit scores jumped. That allowed them to take on more credit card and auto debt\u2014and, eventually, led to higher rates of delinquencies, compared to peers who did not receive loan relief.\u003C\/p\u003E\r\n","format":"limited_html"}],"field_summary_sentence":[{"value":"They find that after the loan forbearance went into effect, distressed borrowers\u2019 credit scores jumped. "}],"uid":"34541","created_gmt":"2023-08-14 18:38:58","changed_gmt":"2023-08-14 20:54:40","author":"Tess Malone","boilerplate_text":"","field_publication":"","field_article_url":"","dateline":{"date":"2023-08-14T00:00:00-04:00","iso_date":"2023-08-14T00:00:00-04:00","tz":"America\/New_York"},"extras":[],"hg_media":{"671393":{"id":"671393","type":"image","title":"debt illustration","body":null,"created":"1692046321","gmt_created":"2023-08-14 20:52:01","changed":"1692046438","gmt_changed":"2023-08-14 20:53:58","alt":"Illustration about debt","file":{"fid":"254432","name":"Screen Shot 2023-08-14 at 2.40.34 PM.png","image_path":"\/sites\/default\/files\/2023\/08\/14\/Screen%20Shot%202023-08-14%20at%202.40.34%20PM.png","image_full_path":"http:\/\/www.tlwarc.hg.gatech.edu\/\/sites\/default\/files\/2023\/08\/14\/Screen%20Shot%202023-08-14%20at%202.40.34%20PM.png","mime":"image\/png","size":4492945,"path_740":"http:\/\/www.tlwarc.hg.gatech.edu\/sites\/default\/files\/styles\/740xx_scale\/public\/2023\/08\/14\/Screen%20Shot%202023-08-14%20at%202.40.34%20PM.png?itok=hyS7YrRj"}}},"media_ids":["671393"],"groups":[{"id":"1214","name":"News Room"},{"id":"1188","name":"Research Horizons"}],"categories":[],"keywords":[{"id":"187915","name":"go-researchnews"}],"core_research_areas":[],"news_room_topics":[],"event_categories":[],"invited_audience":[],"affiliations":[],"classification":[],"areas_of_expertise":[],"news_and_recent_appearances":[],"phone":[],"contact":[{"value":"\u003Cp\u003ETess Malone, Senior Research Writer\/Editor\u003C\/p\u003E\r\n\r\n\u003Cp\u003Etess.malone@gatech.edu\u003C\/p\u003E\r\n","format":"limited_html"}],"email":[],"slides":[],"orientation":[],"userdata":""}}}