7.5% higher default rate: Borrowers optimistic about forgiveness were significantly more likely to fall into delinquency compared to those who paid aggressively.
$100 extra monthly spending: Optimistic borrowers increased non-durable spending while reducing student loan payments by $40 per month — effectively spending money they hadn't saved.
Welfare losses up to 43% of loan balance: In extreme cases, incorrect beliefs about forgiveness cost borrowers roughly **$21,500** on a median $50,000 debt.
Expectation collapse: Nearly 50% of borrowers expected forgiveness in 2022. That dropped to 25% after the Supreme Court blocked the plan in June 2023, and to 10% after the 2024 election.
Why this matters: Policy uncertainty doesn't just disappoint borrowers — it actively harms their financial planning, leading to defaults, damaged credit, and reduced trust in government institutions.
The student loan payment pause began in March 2020 as a pandemic relief measure. What was intended as a temporary stopgap stretched into a three-and-a-half year moratorium, extended seven times. Each "final" extension reinforced a belief among borrowers that forgiveness was inevitable.
According to the NBER paper co-authored by economists Constantine Yannelis (University of Cambridge), Dmitri Koustas, and Michael Weber, the timing of these announcements mattered. Biden's August 2022 executive order — promising $10,000 in relief for most borrowers and $20,000 for Pell Grant recipients — came just months before the midterm elections. When the Supreme Court blocked the plan in June 2023, borrowers who had adjusted their finances around expected relief were left exposed.
> *"If consumers take actions based on beliefs that are not actually true because of mistaken policy promises, they may engage in financial planning that actually turns out not to be in their best interest,"* said Yannelis.
The research linked survey data on borrower beliefs to credit bureau records and consumption data. The findings paint a clear picture:
Borrowers expecting forgiveness stopped making payments and stretched into longer repayment terms.
They increased spending on durable goods — including cars and homes — while waiting for relief.
When payments resumed under the Trump administration — which held the line on repayment and moved defaulted loans to collections — those borrowers faced a sudden financial shock they hadn't planned for.
The chaotic return of payments was further marked by servicer errors, miscalculated bills, and widespread non-payment from the start.
Yannelis noted that the damage extends beyond student loans. The pattern of promising relief and failing to deliver has eroded trust in politicians — at a time when trust was already low. This has direct consequences for other fiscal policy areas, most notably Social Security, whose trust fund is projected to be depleted by 2032, which would trigger automatic cuts of up to 24% for retirees. Many future recipients either don't know or don't believe those cuts will happen.
> *"There would be large benefits to consumers if politicians could give more clear guidance about fiscal policy,"* Yannelis said. *"To the extent that there could be more forward guidance, that would allow consumers to make plans about their lives."*
Young borrowers: who entered repayment for the first time during the pause.
Low-to-middle income borrowers: who relied on forgiveness to manage household budgets.
Pell Grant recipients: who were promised $20,000 in relief — double the standard amount.
Anyone with federal student loans: who adjusted their financial planning around government promises.
How did the student loan payment pause contribute to defaults?
The three-and-a-half-year pause, extended seven times, led borrowers to believe payments would never resume or that loans would be forgiven. Many stopped planning for repayment and increased spending — leaving them unprepared when payments restarted in October 2023.
What does the research say about the financial cost to borrowers?
The NBER study found welfare losses could reach up to 43% of the initial loan balance — roughly $21,500 on a median $50,000 debt. Borrowers who expected forgiveness reduced payments by $40/month while increasing non-durable spending by $100/month.
Are delinquency rates still high today?
Yes. Since payments resumed in October 2023, delinquency rates have reached historic highs, driven in part by the uncertainty created by repeated policy reversals.
Did borrowers who paid aggressively fare better?
Yes. Borrowers who took Biden at his word when he said "final" and continued paying were significantly less likely to default — though they missed out on months of interest-free forbearance that others enjoyed.
Plan for uncertainty: Never assume government relief will materialize. Budget as if full payments are always due.
Build an emergency fund: The sudden resumption of payments caught millions off guard. A 3–6 month emergency fund can absorb policy shocks.
Stay informed: Track policy changes through reliable sources, but don't adjust long-term finances based on campaign promises or executive orders that could be blocked by courts.
Consider income-driven repayment: These plans tie payments to your income and offer a path to forgiveness after 20–25 years — regardless of political changes.
Check your loan status: If you haven't logged into your loan servicer's portal since the pause ended, verify your payment amount, repayment plan, and autopay settings.
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