Saving and Consumption Responses to Student Loan Forbearance

98 Pages Posted: 1 Feb 2023 Last revised: 20 May 2024

Date Written: January 30, 2023

Abstract

To study the impacts of debt relief versus cash transfers, I compare saving and consumption responses to student loan forbearance and stimulus checks in the 2020 CARES Act. Borrowers non-optimally use much of the liquidity received from forbearance to voluntarily prepay 0%-interest student debt instead of high-interest obligations, despite prioritizing high-interest debts when receiving stimulus checks. Consistent with this flypaper effect, the marginal propensity to spend (MPX) out of forbearance liquidity is less than half that of stimulus checks. A calibration exercise estimates that the flypaper effect makes forbearance less effective and more costly as a counter-cyclical fiscal tool.

Keywords: forbearance, stimulus, student loans, household finance, consumer credit

JEL Classification: G50, G51, D14, D91, I22, H3, H81, E21

Suggested Citation

Katz, Justin, Saving and Consumption Responses to Student Loan Forbearance (January 30, 2023). Available at SSRN: https://ssrn.com/abstract=4344262 or http://dx.doi.org/10.2139/ssrn.4344262

Justin Katz (Contact Author)

Harvard University ( email )

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