Hutchins Roundup: Loan forbearance, tutoring, and more


Studies in this week’s Hutchins Roundup find loan forbearance and income support prevented delinquencies during COVIDpersonalized tutoring is a low-cost way to improve student performance, and more.   

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Federal loan forbearance and income support prevented borrower delinquencies during COVID  

Despite historic unemployment rates during the pandemic, delinquencies on household debt have fallen—a trend Lisa Dettling and Lauren Lambie-Hanson of the Federal Reserve Board attribute to the CARES Act’s widespread loan forbearance and income support. Although many households’ ability to repay debt has fallen, the authors say the federal program (and some lenders voluntarily offering temporary relief) have caused debts to go into forbearance rather than delinquency. Using variation across time and geography in COVID severity, economic conditions and government policy responses, the authors find that a 1 standard deviation increase in the unemployment rate or COVID case counts increases the share of mortgage borrowers in delinquency and/or forbearance by about 20 percentage points. A 1 standard deviation increase in the generosity of CARES Act income support lowers delinquency and/or forbearance rates by roughly 25%—suggesting that boosting household incomes helped borrowers make their payments.  

Personalized tutoring during adolescence improves outcomes at low cost  

Intensive tutoring is widely regarded as an effective but costly way to improve educational outcomes. Sage Education, a non-profit based in Chicago, offers a low-cost solution by recognizing that being an effective tutor requires fewer specialized skills than does classroom teaching. They hire people to tutor for just one year for a modest stipend, as a sort of public service. Jonathan Guryan from Northwestern and co-authors use randomized control trials of over 5,300 9th and 10th grade students in Chicago Public Schools to study the impact of the Sage model. After one year of the program, they find an increase in math achievement test scores of between 0.16 and 0.37 standard deviations, two to four times the average annual math test score gain, and increased grades in math and non-math courses. Combining prior research on the monetary benefits of similar programs, the authors estimate that the value of the gains is between $9,000 and $21,000. Noting that the estimated benefit-cost ratio is comparable to many successful model early-childhood programs, they authors conclude that “adolescence is not too late to realize large social benefits from human capital investment.”  

COVID will moderately lower the level of potential GDP, but is unlikely to affect its growth  

Potential GDP—the total output of the economy when operating at full capacity—will likely be lower post-pandemic, predict John Fernald and Huiyu Li of the Federal Reserve Bank of San Francisco. Early retirement, withdrawal from the labor force due to childcare demands, business closures and other pandemic-related channels are likely to hold back labor supply in the near-term, and lengthy school closures may have lowered human capital in the long-term. Productivity may be negatively affected as businesses spend time and resources adjusting to more widespread work from home and social distancing measures. Overall investment has fallen as well, while the increase in investment in IT has mostly gone towards duplicating equipment that currently sits idle in workplace offices. The authors project these effects to be modest, however, and expect little change to the pace of growth of potential GDP, which was subdued even before the downturn due to a slow-growing labor force and limited innovation, factors COVID-19 is unlikely to change). About 5 to 10 years post-pandemic, the authors forecast GDP growth at a little above 1.5%, about the same as their pre-pandemic projection.  

Chart of the week: High-wage jobs increased in 2020, even as low-wage jobs plummeted 

Bar graph depicting change in number of jobs from 2019 to 2020 by quartiles of 2019 hourly wages

Quote of the week:  

“The COVID shock has been profound, and has required an increase in public and business debt to smooth the impact. This is a necessary and sensible response. It means that the economic impact of COVID will be spread over time – how long we don’t know because it is too early to predict. But that cost has to be managed, and it will be easier to do that with a higher trend rate of growth, boosted by stronger investment,” says Andrew Bailey, Governor of the Bank of England. 

“Let me add that this investment is also needed to support the transition required by climate change and the necessity of enabling a more digital economy. These are challenges and opportunities. The message is simple: stronger growth in potential supply supported by stronger investment and productivity growth will make the COVID recovery easier.”