Publications
Publications
- 2023
Savings and Consumption Responses to Student Loan Forbearance
By: Justin Katz
Abstract
How do households adjust savings and consumption in response to liquidity from debt relief? I study this question using policy variation induced by federal student loan forbearance in the 2020 CARES Act and an individual-level panel of daily financial transactions
for 315,000 borrowers. Borrowers manage liquidity from the payment pause non-optimally,
choosing to prepay 0%-interest student debt instead of high-interest obligations. The same
borrowers do not make the same mistakes in response to liquidity from direct stimulus payments, and instead correctly prioritize repaying high-interest debt. This behavior suggests
a flypaper effect that causes borrowers to treat liquidity from debt relief as non-fungible
with liquidity from other windfalls, leading to debt repayment mistakes. Consistent with
the predictions of such an effect, borrowers display a marginal propensity to spend (MPX)
out of forbearance liquidity that is around half the size of their MPX out of fiscal stimulus.
These findings provide evidence against models where consumers treat financial resources
as fungible when making debt repayment decisions, with implications for debt relief as a
countercyclical fiscal policy tool and ongoing debates about the aggregate impacts of student debt forgiveness
Keywords
Saving; Consumer Behavior; Borrowing and Debt; Interest Rates; Financial Liquidity; Personal Finance; Government Legislation
Citation
Katz, Justin. "Savings and Consumption Responses to Student Loan Forbearance." SSRN Working Paper Series, January 2023.