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 countercyclical fiscal tool.
Discussant: Sheisha Kulkarni, University of Virginia
Abstract: We develop a dynamic household finance model showing that student loans -- non-dischargeable in the U.S. bankruptcy -- can alleviate the well-documented debt overhang problem in household labor supply decisions. Non-dischargeability mutes the opportunities for households to strategically pull back from supplying labor at the expense of creditors, thus correcting such incentive distortions. This corrective effect of student loans, however, is partially undone by the option of Income Driven Repayment (IDR) plans, which sets student debt payment as a proportion of households' future income, regardless of borrowing amount and outstanding balance. IDR thus allows households to pseudo “discharge” student debt and re-activates the debt overhang problem. We supplement our model with empirical analyses, and derive policy implications speaking to the recently proposed reforms in IDR plans and student debt forgiveness.
Discussant: Sylvain Catherine, University of Pennsylvania
