This Week in the Mayonnaise Clinic: The Student Loan Pause Only Makes Sense as Pandering

But it's pretty good pandering. Plus: should you wear flip-flops on planes?

Dear readers,

On Wednesday, the Biden Administration announced that it will again extend the student loan repayment pause, this time through the end of August. In theory, this is a temporary measure in response to COVID. In practice, as we last discussed in February, the politics of ending it are very thorny, even as the peak pandemic has waned. And the pause is not free: while debtors will typically¹ eventually need to make the principal payments that are being delayed, they are enjoying foregone interest, and the cost to the federal government is about $4-5 billion a month.

So, what are we getting for that? A reader who is one of the pause’s beneficiaries, Brett McKee, wrote in (before the administration’s announcement) to ask about that:

Prior to the pandemic my wife and I would spend about $900 each month on student loan payments. Since these payments were paused we’ve had a lot more disposable income each month. Assuming these payments resume in May for me and others like me, wouldn’t this have some impact on inflation? I feel like it would bring inflation down? I haven’t heard anyone discuss the relationship between the pause in student loan payments and increased demand. Maybe I’m trying to make connections that don’t exist? All I know is I really don’t want to start paying again.

Yes, the student loan pause is inflationary, for the reasons Brett describes: some 37 million debtors aren’t having to make payments they ordinarily would, and they can spend that money on other things. The pause is not terribly different in structure from stimulus checks, or aid to state governments, or enhanced unemployment, or any of the other stimulative programs we had in response to COVID over the last two years, which worked by putting additional cash out into the economy.

This kind of stimulus will almost always produce some combination of real economic growth and inflation, but the proportion of the two depends on how close the economy is to capacity — and as I discussed in February with economist Jason Furman, that calculus tipped from being heavily in favor of growth in 2020 to being heavily in favor of inflation in 2021 and 2022.

The main question is how inflationary a continued student loan pause will be, and how the inflation cost weighs against other benefits (and costs).

You may recall a few weeks ago that I endorsed a federal gasoline tax holiday. Like the student loan pause, this is a policy to put more money in consumers’ pockets (by relieving them of a tax obligation) and it would inflate the price of goods other than gasoline by leaving consumers with more cash to spend. But I made a few judgments: households would gain more purchasing power through lower gas prices than they would lose through inflation; consumers are especially focused on gasoline prices; and highly visible steps to moderate gasoline prices would both give the administration a freer hand to respond to a foreign policy crisis that is pushing up oil prices and help save Democrats from an electoral bloodbath in November. The benefits of a gasoline tax holiday would also be fairly equitable, since most households have gasoline-powered cars and lower-income households tend to spend a higher percentage of their income on fuel than higher-income households.

Now, let’s compare this to the student loan pause.

The student loan pause is almost twice as expensive per month as a gasoline tax holiday would be. Accordingly, the inflation effect would be larger, but it’s still pretty hard to pin down how large. Last month, the Committee for a Responsible Federal Budget (a centrist group that opposes budget deficits) published estimates of the inflation effects of three pandemic relief policies it would like to wind down: the student loan pause, plus enhanced Medicaid payments to state governments and Medicare payments to providers. And CRFB’s estimates imply that ending the student loan freeze might knock anywhere from 0.04 percentage points to 0.2 percentage points off the inflation rate.

That’s not a completely trivial figure (especially if it comes in on the high side) but it’s not a huge figure either. It’s smaller, for example, than the inflation reductions the president could likely achieve through discretionary actions to relieve Trump-era tariffs. To consider whether it’s worth enduring the inflation created by the pause, we need to examine the pause’s benefits.

I am extremely unpersuaded by “fairness” related arguments about student debt relief. No offense to you, Brett, but student debtors are disproportionately educated, and those with the largest balances are the most disproportionately educated. Education debt burden is strongly correlated with income, with 73% of payments in 2019 coming from earners in the top two income quintiles — which is what you’d expect, since the largest loan balances are accrued seeking graduate degrees that are ordinarily supposed to help the borrower earn a higher income. And the student loan pause is significantly more regressive in its structure than the partial student debt cancellation programs that Democratic politicians often discuss since its benefits are uncapped: by far, the largest benefits accrue to people like medical doctors and lawyers, who have the highest debt balances.

So I tend to agree with Larry Summers that, from a pure policy perspective, student debt relief is very unattractive: its benefits are not well targeted for fairness, they don’t encourage people to get more education, and they provide fiscal stimulus that is undesirable in the current environment.

All that said, I entirely understand why the administration keeps extending the pause, and if I were in their shoes, I would do the same thing for political reasons.

The progressive-activist theory that outright debt cancellation would fuel voter turnout in the midterms never made much sense to me. As Mitch McConnell says, voters don’t turn out to say thank you. But people do tend to get very attached to the benefits they already have and pretty pissed off when they go away. So if I were in the White House, and I was thinking about the prospect of making Brett and his wife and millions of other voters like them pay hundreds of extra dollars a month right as we headed into the midterm elections — yeah, I’d look for a way to kick the can down the road, too. So the idea that the pause will expire in August seems implausible to me at this point; if you’re delaying until then, you’ll delay until after November.

I only wish the administration would apply this same logic to the issue of Title 42 and apprehensions at the southern border. Like with the student loan pause, the use of Title 42 to limit asylum applications during the pandemic is an administrative action that has gotten more and more pretextual as the acute pandemic has waned. And as with lifting the student loan pause, rescinding the Title 42 order will be a real political mess. It will once again overwhelm our capacity to process asylum seekers and it will encourage an increased flow of unauthorized migrants seeking to enter the country for primarily economic reasons. This will be very unpopular.

But the administration seems intent on implementing the lifting of the Title 42 order, inviting an extremely visible mess at the border right before the midterm elections. I think it’s absurd as a matter of prioritization to expend so much political capital on a policy whose primary constituency is non-citizens who don’t vote. The administration should instead be applying the same can-kicking logic here (we got this far, didn’t we?) that they continue to use on the student debt pause.

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Mike asks:

There’s a sense by some that people who live in big coastal cities like New York, Washington, and Los Angeles are out of touch with the rest of the country. I live in suburban Detroit, so we’re used to the rest of the country treating us like America’s red-headed stepchild.

Do you think the widening urban/rural divide needs to be addressed to avoid growing partisanship and make the country more functional? I think it’s important to heal the divide because our political institutions, especially the Senate, give disproportionate power to politicians in the middle of the country. If you think it’s a problem, then what should we do to solve it? 

So I am actually skeptical of the “urban/rural divide” frame here, especially when it’s applied to separate a few coastal megacities from everywhere else. I think what we have is increasing education polarization, which is hurting the Democratic Party in part because of the way it happens to map onto geography, but it doesn’t map on in exactly the way you describe.