Student Loan Policy Uncertainty Has Real Costs | American Enterprise Institute

To put it mildly, opinions varied on whether the Biden administration’s student loan policies—namely its repeated extensions of the COVID-era payment moratorium and attempt at mass loan forgiveness—were good ideas. But new evidence suggests that the uncertainty that these policies created for borrowers was harmful in and of itself. The expectation of future extensions of the moratorium and loan forgiveness led borrowers to make fewer payments on their loans—and the ripple effects are still being felt today.

The student loan payment pause began in March 2020 under the first Trump administration. While it was initially supposed to last only a few months, Trump and Biden extended the moratorium eight times. Delays in the resumption of payments were often framed as the “final” extension of the pause only for authorities to decree another extension at the last minute. The Republican-controlled House of Representatives finally forced a firm end to the pause in May 2023, passing the Fiscal Responsibility Act to bar any further extensions.

As reported in a new National Bureau of Economic Research working paper, economists Dmitri Koustas, Michael Weber, and Constantine Yannelis surveyed borrowers throughout the pause about whether they expected an extension to the moratorium. Borrowers who were more “optimistic” about an extension to the pause reduced their payments every month by an average of $40. Many borrowers didn’t pay at all, and that behavior continued even after the pause ended. By May 2025, several months after the pause effectively ended, “optimistic” borrowers were 7.5 percentage points more likely to be at least three months delinquent on their loan payments.

The team also examined Biden’s mass student loan cancellation policy, which the administration announced in August 2022. Though the Supreme Court struck down loan cancellation the following year, the announcement still led borrowers to expect their loans would be forgiven. These borrowers also reduced their loan payments in anticipation of the jubilee, but it cost them in the long run. Lower payments meant that interest piled up. The authors calculated that reducing payments in anticipation of forgiveness cost borrowers up to 7 percent of their loan balances—thousands of dollars for a typical loan.

“When policymakers announce policies that later face legal or political obstacles,” write Koustas, Weber, and Yannelis, “households may adjust their spending, saving, borrowing, and repayment decisions in anticipation of benefits that may never arrive.”

The fallout is still with us today: over 12 million borrowers are either in default or delinquent on their loans, a third higher than the pre-pandemic number. It’s not surprising that the anticipation of forgiveness and repeated extensions of the pause—not to mention the wild uncertainty these policies created—caused borrowers to lose the “muscle memory” of loan repayment. Millions are still not paying.

The report’s findings are an indictment of Biden administration policy. The White House never should have announced a sweeping loan forgiveness plan that they had no legal authority to implement. Moreover, the Biden Department of Education should have had a clear plan and timeline for winding down the payment pause rather than extending it over and over again.

But the Trump administration should also take the findings as a warning, as its policies have created new uncertainty for borrowers. During the repayment pause, involuntary collections on defaulted student loans—notably wage garnishment and seizure of tax refunds—were suspended. The administration partially resumed involuntary collections in 2025. But in January of this year, the administration abruptly shut off collections once again. Officials promised collections would resume at some point, but have laid out no clear timeline to do so.

It may seem kind to spare defaulted borrowers from having their wages and tax refunds taken. But the longer that the government allows borrowers to sit in default, the more interest accrues on those defaulted loans. When involuntary collections eventually resume, balances will be that much higher—and the inevitable collections will be even more painful.

As the report shows, borrowers can and will change their behavior when the government suspends consequences for nonpayment—especially if they believe that officials will extend that moratorium on consequences indefinitely.

The lesson is that executive branch officials, rather than making sweeping and sudden changes in policy, should take steps to minimize uncertainty for borrowers. While the temptation is strong to delay the consequences of not paying your loans, it can leave borrowers worse off in the long run. The Biden administration made many mistakes on student loans. The Trump administration should take care to avoid repeating history.