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Debt Relief and Economic Recovery


Published July 28, 2021

New research indicates that targeted household debt relief helps the economy recover. Defaulting on loans creates a negative domino effect on the economy, but during the 2008 recession, household debt relief was vital in stabilizing housing prices and employment. The 2020 pandemic has had a devasting effect on the economy, but targeted debt relief could help get the economy back on track.

Discussion Questions:

  1. Why is debt relief necessary?
  2. How can debt relief speed up economic recovery?

Additional resources:

  • Read “If You Want a Quick Recovery, Forgive Debts,” by Tomasz Piskorski and Amit Seru. Available here.
  • Watch as Amit Seru talks about government and household private debt relief during the pandemic. Available here.
  • Watch as Amit Seru provides an overview of the financial regulations and challenges facing the banking sector. Available here.


View Transcript

From widespread unemployment, to shuttered businesses and shattered supply chains, the COVID-19 pandemic’s effects on the economy will be felt for years.


Congress has already spent trillions of dollars in response to the pandemic. The federal government has mailed millions of stimulus and unemployment checks, subsidized businesses, and given billions in aid to state and local governments. The hope is that these policies will provide relief to those in need and support the economy.


But there is a better way to support the economy and one that will hasten the economic recovery: targeted household debt relief.


We know how important household debt relief can be to economic recovery because we saw its effects in the aftermath of the Great Recession.


Like the 2020 pandemic, the 2008 Great Recession was devastating. Unemployment rates approached double digits, stock portfolios collapsed, and housing prices plummeted. Millions of families found themselves unable to pay their mortgages, credit card bills, or student loans.


Default is, of course, painful for the families and individuals who can’t pay their debts. And the pain of default does not stop with borrowers: The damage creates ripple effects that slow down the economy. Ruined credit scores make it harder for borrowers to get future loans, foreclosed homes fall in value and bring down neighborhood property values, and cities suffer when borrowers have less to spend at local restaurants and businesses.


That’s why household debt relief was so important during the Great Recession.


My coauthor Tomasz Piskorski from Columbia University and I analyzed a decade of economic data from millions of US households following the Great Recession. We found that regions that did not receive household debt relief took about four more years to recover in terms of consumer spending, housing prices, and employment than the ones that did.


Unfortunately, during the Great Recession, the debt relief policies were only slowly enacted. It took over a year from when the recession started before Congress adopted any debt relief measures.


Congress didn’t make the same mistake during the COVID-19 pandemic. Within weeks of the shutdowns, Congress allowed borrowers to defer payments on federally insured mortgages and government student loans. And many private lenders adopted similar policies.



One year after the pandemic’s economic shutdowns, an estimated 60 million US consumers had postponed loan payments. In total, $70 billion in mortgage, car loan, and student loan payments were in forbearance.


This provided important targeted short-term relief and support. My research shows that most of the debt relief, particularly for mortgages, went to those who most needed it. Forbearance rates were the highest in the regions with the worst COVID-19 outbreaks and areas that suffered from the greatest economic distress. The debt relief allowed people to keep their homes, and likely prevented over 2 million delinquencies that would have otherwise devasted the nation’s housing market.


The forbearance plans provided short-term relief, but they haven’t permanently solved the problem. In the coming months and years, those behind on their payments will need to repay them. That preserves incentives in the financial system. To avoid widespread defaults, lenders will need to restructure loans to ensure borrowers in need aren’t forced to repay outstanding balances immediately.


It will ultimately require a coordinated effort between government policymakers and lenders to ensure borrowers can avoid default. And that will be in everyone’s interest, since successfully unwinding debt will be essential in ensuring a rapid recovery.