Biden’s student loan cancellation plan would do next to nothing to boost economy, says Goldman

Top line

As debate over federal student loan cancellation intensifies ahead of President-elect Joe Biden’s inauguration, Goldman Sachs predicts that even substantial student debt relief would do little more than boost economic growth , although the cause has been championed by progressive lawmakers and some economists. as a way to stimulate economic activity while addressing racial inequalities and providing pandemic relief.

Highlights

In a note to clients on Monday, Goldman said he estimated forgiving up to $ 10,000 in federal student loans for each borrower would add less than 0.1% to the country’s gross domestic product each year from 2021 to 2030, and over that period, that would only add 43 cents of real GDP for every dollar of debt canceled.

The cost of forgiving up to $ 10,000 per borrower would be around $ 300 billion, or about 1.6% of GDP, Goldman estimates, while forgiving up to $ 50,000 could cost around $ 800 billion. although Biden never promised this student loan forgiveness degree.

Most of the nearly $ 1.6 trillion in federal student loans made to more than 43 million borrowers are held by middle- and upper-income households, who would likely save and spend much of their money. cancellation of the loan, notes Goldman, echoing the concerns of critics who say that canceling the student loan would disproportionately benefit people with higher incomes.

Additionally, canceling the student loan could have “potentially significant tax implications that could do more harm than good” to short-term borrowers, according to Goldman, noting that debt forgiveness is generally viewed as income. taxable which could require taxpayers to pay around 20%. of the debt finally canceled in taxes except legislative or administrative modification of the tax rules.

Since federal student loans have already been funded by the Treasury Department, the net effect on the nation’s budget would be relatively negligible and spread over many years “due to lack of interest and principal payments.” if the government cancels loans through multi-year payment cuts, Goldman notes.

If the loans were canceled immediately, however, “the treasury’s funding requirements might actually decrease,” Goldman says, “because the tax payments on the canceled amounts would likely more than compensate for the lack of scheduled loan repayments.”

Key context

President-elect Biden ran on a bold but expensive higher education platform that includes student loan forgiveness for Americans after 20 years of repayment capped at 5% of personal income (compared to current programs capping repayment at 10%). He also said that Congress should “at once“Cancel $ 10,000 in federal student loans for every borrower in the wake of the Covid-19 pandemic, as did some democratic senators. Given the pandemic’s disproportionate toll on minority groups, the idea has gained traction as an economic stimulus measure that could help bridge racial inequalities as minorities, on average, are in more debt than white Americans. In addition, research from the Urban Institute found this borrowers with persistent student debt (dating back to the mid-1990s or earlier) tend to default on higher rates, have lower credit scores, and live in low-income neighborhoods than other borrowers.

Crucial quote

“There are several reasons to be skeptical that canceling student debt would significantly boost consumption,” a group of Goldman analysts led by Jan Hatzius said on Monday. “Most student debt – and the vast majority of debt with large balances – is held by households with higher education or vocational degrees who have high income potential and are less likely to pay off. ‘have limited resources. “

Chief critic

“The last time our economy collapsed, this country made a devastating mistake: We turned our backs on students and families to bail out giant banks,” said Senator Elizabeth Warren (D-Mass.) mentionned when a student loan cancellation plan was introduced in March. “Student loan borrowers, especially students of color, have never fully recovered from this economic blow to the stomach. This time around, by canceling student debt payments for millions, we will correct the mistake that still holds back a generation of people and has driven our economy, and create a real local stimulus to help us get through this crisis. ”

What to watch out for

Relief in the new administration. Control of the Senate depends on Georgia’s second round scheduled for January 5. Barring a win for the two Democratic candidates, Goldman says a divided government still looks the most likely for the next two years, which means canceling student loans would likely have to come through executive action. None of the major stimulus proposals currently in Congress include student debt cancellation measures, Goldman notes, and President-elect Biden has not pledged to use an executive order to push through the cancellation of student loans.

Tangent

Many economists have warned that student loans, which last year became the largest source of non-mortgage debt in the country, created a huge debt bubble similar to the subprime mortgages that triggered the Great Recession. Citing Moody’s Analytics, the Wall Street Journal reported that private lenders lost $ 535 billion on these bad subprime mortgages, just 23% more than the US federal government. now projected to lose their “toxic” student loan debt, that is, loans that are unlikely to be repaid with interest.

Further reading

5 great ideas for closing the racial wealth gap (Forbes)

The policy of canceling student debt (Forbes)

As Biden administrator considers canceling student loans, taxpayers could be forced to pay $ 435 billion from federal student loan program (Forbes)

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