Abstract:
The authors document that the costs of student debt extend beyond borrowers to their parents. Exploiting the student loan federal payment moratorium, which paused payments for a subset of borrowers, the authors estimate the effect of children's debt relief on parental finances. Parents of treated borrowers experience a 5.7% reduction in installment delinquencies, a 6.4% decline in bankruptcy, and increased mortgage, installment, and home equity borrowing. Effects concentrate within families with stronger financial ties and where children are least able to manage their obligations, and imply that borrower-only evaluations of debt relief understate its credit response by roughly a third.
Student Loan Debt Is Apparently a Family Plan
The financial consequences of student loan debt do not stop with the person whose name appears on the promissory note.
This paper uses the federal student loan payment moratorium as a natural experiment to examine what happened to parents when their adult children's student loan payments were temporarily suspended. The results are substantial: parents of borrowers who received the payment relief experienced a 5.7% reduction in installment-loan delinquencies and a 6.4% decline in bankruptcy.
That is an important finding because the parents did not receive student loan relief themselves. Their children did.
The explanation is hardly mysterious. Families do not operate like separate corporate subsidiaries. Parents help children make rent, cover emergencies, pay bills, buy cars, and sometimes directly or indirectly help with student loan payments. Conversely, financially struggling adult children may have little ability to help aging parents. Relieving financial pressure on one generation consequently improves the balance sheet of the other.
The effects were strongest where those financial connections were strongest and where the children were least able to manage their own obligations. Parents also increased mortgage, installment, and home-equity borrowing after their children's student loan payments were suspended—suggesting that the relief did more than simply prevent defaults. It restored some parents' access to and willingness to use credit.
Perhaps the paper's most significant conclusion is that studies looking only at student loan borrowers may be missing roughly one-third of the credit effects of student debt relief because they ignore what happens elsewhere in the family.
Bankruptcy Is a Family Financial Problem, Too
For consumer bankruptcy attorneys, none of this should be particularly surprising.
We routinely see parents who have depleted savings, run up credit cards, borrowed against their homes, delayed retirement, or otherwise stretched their own finances trying to keep their children afloat. Sometimes the student loans themselves belong to the parents through Parent PLUS loans; other times the parents have no legal liability whatsoever but nevertheless bear very real economic costs.
That makes the 6.4% reduction in parental bankruptcy particularly striking. Temporarily relieving one person's student loan obligation measurably reduced the likelihood that a different person—his or her parent—would need bankruptcy relief.
This also illustrates why debates about student loan repayment, forgiveness, income-driven repayment, and bankruptcy discharge should not pretend that the only relevant balance sheet belongs to the borrower. Student debt can push financial distress both up and down the family tree.
And when policymakers calculate the costs and benefits of student loan relief by looking only at the borrower, this research suggests they are substantially understating the benefit. The government may see one student loan account. The family sees one household helping another.
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