![]() (2017) and Fuster and Willen (2017), and with the literature on marginal propensity to consume out of transitory income shocks (e.g. This is consistent with the evidence on the effects of lower monthly mortgage payments shown by Di Maggio et al. For instance, Ganong and Noel (2018) show that, in the context of the Home Affordable Modification Programme (HAMP), principal write-downs had no impact on underwater borrowers, while lower monthly payments benefited borrowers. ![]() ![]() Alternatively, policymakers could implement interventions targeting the debt overhang problems associated with facing a significant debt burden, for example forgiving student loan principals altogether.Ī recent strand of the literature shows that alleviating short-run liquidity constraints in mortgage markets have beneficial effects on individuals’ behaviour. For instance, the policies might be designed to target the liquidity constraints that have pushed the borrowers into distress, for example by relating the monthly repayments to borrowers’ income. Several policies have been advocated to help borrowers unable to meet their financial obligations – including by Democratic presidential candidates Elizabeth Warren and Bernie Sanders – especially in the private student loan market, which is usually tapped by more fragile borrowers attending for-profit institutions and experiencing lower returns to education.Ī general lack of consensus on the policy objectives exacerbates the situation. This situation has ignited a heated debate about potentially bringing relief to borrowers crippled by student debt, and policymakers have considered ways to keep the student-loan problem from swelling out of control. The newly appointed chairman of the Federal Reserve even stated in March 2018 that “As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth”.1 The policy debate These trends might have aggregate effects because about 44 million graduates hold student debt, with amounts averaging more than $30,000, and such a burden might constrain borrowers’ consumption and savings decisions. ![]() Furthermore, 11% of borrowers are 90 days or more delinquent on their student debts. Student debt has in fact reached $1.5 trillion in the first quarter of 2018 (New York Fed 2019), surpassing auto loans, credit-card debt and home-equity lines of credit, and is currently the second-largest source of consumer debt in the US, trailing only mortgage liabilities. A crisis in the US student loan market has been looming over the economy due to an explosion in recent graduates’ indebtedness since the Great Recession and a worrisome increase in delinquency. ![]()
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