Available at SSRN: https://ssrn.com/abstract=6954401
Abstract:
How does uncertainty about future government policy affect households' beliefs and subsequent borrowing, spending and debt payment behavior? We study these questions through the lens of student loan forgiveness in the United States, which following electoral promises, was announced in 2022 but never implemented due to judicial rulings. We conduct a customized information provision experiment embedded in a survey eliciting real-time beliefs about future debt forgiveness and repayment, which we link to credit bureau data, employment verification data, and nondurables consumption. Eligible borrowers who are more optimistic about forgiveness reduce payments on student loans by $40 per month and increase non-durable spending by $100 per month. We also find some evidence optimistic borrowers may postpone durable spending waiting for uncertainty to resolve. Borrowers optimistic about future payment pauses make fewer payments on their student loans, reduce payment by $40 per month and are 7.5 percentage points more likely to be delinquent after payments resume. A quantification exercise finds welfare losses from incorrect beliefs can exceed 43 percent of the initial loan balance. Our results provide micro-evidence on the role of policy uncertainty in household decision-making, and have implications for government announcements and commitment policy.
Summary:
Koustas, Weber, and Yannelis examine what happens when student loan borrowers are forced to make financial decisions in the fog of half-promises, political announcements, litigation, injunctions, and shifting repayment rules. Their answer is unsurprising to anyone who has represented consumer debtors: people act on what they believe the government is going to do, even when those beliefs later turn out to be wrong.
Borrowers who believed forgiveness or continued pauses were likely made fewer student loan payments, spent more on ordinary consumption, and then were more likely to fall behind when repayment resumed. The paper finds that optimism about another payment pause translated into roughly $40 less per month in student loan payments and a 7.5 percentage-point higher likelihood of serious delinquency after repayment restarted.
Figure 2 from the paper is particularly striking and worth studying. It traces borrowers' expectations that some portion of their student loans would be forgiven over time. Beliefs climbed dramatically after the Biden Administration announced broad student loan forgiveness in August 2022, then steadily collapsed following the court injunctions and ultimately the Supreme Court's decision in Biden v. Nebraska. More importantly, the graph demonstrates that borrowers were not waiting for final legal decisions—they were changing their financial behavior as their expectations changed.
Figure 2: Survey Beliefs About 1-Year Ahead Forgiveness
Notes: Figure shows mean beliefs about 1-year ahead forgiveness from our surveys. Each dot is an average over individuals surveyed in the week. Source: Qualtrics survey and Numerator survey.
Commentary:
This paper should be required reading for anyone who thinks student loan repayment is simply a matter of borrower discipline. It shows that the borrower’s behavior is not occurring in a vacuum. It is occurring in a policy environment where the rules keep changing, courts intervene, repayment plans appear and disappear, and borrowers are expected to make household-budget decisions while Washington plays Calvinball.
That matters now more than ever. The One Big Beautiful Bill Act has substantially reshaped federal student loan repayment, including movement toward RAP and tiered standard repayment options for new borrowers, while existing borrowers face transition rules and eventual limits on older repayment options. (StudentAid) The SAVE Plan’s collapse and transition deadlines leave millions of borrowers again trying to guess what their future monthly payment will be. (The Guardian)
At the same time, defaulted borrowers remain under the shadow of renewed collection. The Department of Education announced in 2025 that collections on defaulted federal student loans would resume, although involuntary collections such as wage garnishment and Treasury offset have since been paused during implementation of new repayment reforms. (U.S. Department of Education) Federal Student Aid still warns borrowers that default can lead to wage garnishment and Treasury offset. (StudentAid)
The predictable result is not clarity, but paralysis. Some borrowers will overpay out of fear. Others will underpay out of hope. Many will do nothing because they cannot tell which door leads to rehabilitation, which leads to consolidation, which leads to RAP, which leads to IBR, and which leads to a garnishment notice.
For consumer bankruptcy attorneys, the lesson is practical: Chapter 13 may increasingly become one of the few stable tools available to manage student-loan chaos. It will not usually discharge the student loan by itself. But it can protect wages, stabilize the household budget, stop competing collection pressure, and create room for the debtor to pursue IDR, rehabilitation, consolidation, PSLF credit, or a separate student-loan adversary proceeding.
The irony is that Congress and the Department of Education keep describing these shifting repayment systems as alternatives to bankruptcy. In practice, the uncertainty they create may push more borrowers toward bankruptcy simply because Chapter 13 offers what the student-loan system increasingly does not: a court-supervised payment structure, enforceable protections, and at least some breathing room.
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