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Student loans are a special kind of debt. They are an investment to increase someone’s future earnings, though they must be paid back before most of those earnings are realized. Most of the loans are directly from the government, which not so long ago was telling borrowers they wouldn’t have to pay them back, and didn’t require them to. They are among the few kinds of debt that can’t be discharged in bankruptcy. They also have one of the highest rates of default.
A new research paper argues that all these facts may be related. During and just after the pandemic, there was a moratorium on student loan payments, and the government even promised to forgive much of the debt. The Supreme Court put an end to that idea in a 2023 decision — and since payments have resumed, more borrowers than ever are delinquent.
The high delinquency rates are often attributed to financial hardship, which is related to the affordability crisis. No doubt some borrowers are finding it hard to make their payments. But the paper says that the uncertainty around debt repayment is a big reason that many people aren’t paying back their loans. In 2022, according to the paper, nearly 50% of borrowers surveyed expected their debt would be forgiven. That figure fell to 25% after the Supreme Court decision — and even after President Donald Trump’s re-election in 2024, about 10% still expected forgiveness. The three-and-a-half year pause on payments fostered this belief.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.