The misguided student loan payment pause will (finally) end

The three-year student loan payment moratorium will finally end in August, thanks to a last-minute bipartisan deal to increase the federal debt ceiling. The pause, which Congress authorized for six months at the beginning of the COVID-19 pandemic, was unilaterally extended several times by the Trump and Biden administrations. Despite the Biden administration’s assurances that the pause would end for good in August 2023, many analysts expected another extension. The debt ceiling deal commits the administration to restart payments.

Interest rates have been set at zero for the duration of the pause, and borrowers may count time spent in the pause towards loan-cancellation programs such as Public Service Loan Forgiveness. For these reasons, the moratorium costs taxpayers $5 billion per month. When the pause ends in August, the total bill will be $195 billion—more than the government has spent on financial aid for low-income college students for the last eight years.

Because interest forgiveness rewards borrowers with larger balances and higher interest rates, those who benefit most from the pause are those with expensive advanced degrees, especially doctors and lawyers. The Committee for a Responsible Federal Budget has calculated that the average M.D. graduate enjoyed $68,000 in benefits from the pause, while the average J.D. graduate reaped $41,500 in benefits. Borrowers with only a bachelor’s degree received just $6,500.

Moreover, new research shows that the payment pause did not reduce borrowers’ indebtedness, even though interest rates were set at zero. Comparing federal student loan borrowers to borrowers with privately held loans (which were ineligible for the moratorium), researchers Michael Dinerstein, Constantine Yannelis, and Ching-Tse Chen found that borrowers subject to the pause owed $1,500 more than they would have otherwise. The moratorium also led federal borrowers to take on an additional $1,200 in other consumer debt, relative to the comparison group.

The three-year student loan payment pause, therefore, was an expensive and regressive policy that did nothing to help borrowers pay down what they owed. Congress was right to end it. But the real challenge for policymakers may be yet to come.

The Department of Education (ED) is about to undertake an unprecedented task: transitioning tens of millions of borrowers who have not paid their loans since 2020 back into normal repayment. The many extensions of the pause mean borrowers have received conflicting information regarding when they will need to start repaying their loans. Moreover, multiple federal loan servicers have ended their contracts with the government, meaning the confusion will compound when millions of borrowers must coordinate with a new servicer to make their payments.

ED and servicers may require additional resources to smooth the transition into repayment. Congress may repurpose unspent pandemic relief funds that the debt ceiling deal will claw back from ED and other agencies. A portion of that could be applied to a modest and temporary funding increase for student aid administration. (For context, the White House requested an additional $620 million for fiscal year 2024.) Republicans worried about indirectly funding Biden’s political priorities like mass loan forgiveness could stipulate that the money be used only to enroll borrowers in loan repayment plans.

The student loan payment pause should have ended years ago. Its extensions have cost taxpayers nearly $200 billion and have failed to reduce indebtedness. Moreover, the repeated extensions could make the scheduled resumption of payments all the more chaotic. While fiscal hawks can celebrate the moratorium’s end, Congress should take steps to ensure that the transition back to repayment is as smooth as possible.