The pandemic has provided an opportunity to test theories about student loan debt and its effect on household wealth creation and the economy. Forgiving student loans could potentially boost economic growth, improve household balance sheets, and help close the racial wealth gap. However, there are concerns about how people would use the extra money, whether they would invest it in the economy or save it to improve their own finances.
The government response to the pandemic has suspended payments on government-owned student loans, which has resulted in more disposable income for those who were affected. However, this has had mixed results. There have been fewer student loan delinquencies and slightly higher credit scores, but those with private loans were not subject to the suspension and have higher student loan balances. Additionally, the suspension of student loan payments did not have a significant effect on other types of debt arrears, and household debt worsened for those who benefited from the moratorium.
The lessons learned from this situation are complex. Policies can have mixed results, with benefits in some areas and drawbacks in others. It is challenging to get people to save more, and people respond to incentives in unexpected ways. Wise policymakers must remain open to surprises and adjust their policies accordingly.