The White House on Wednesday finally launched its student loan relief program, saying it would cancel up to $20,000 of debt per borrower for households earning up to $250,000.
Read it: Biden Cancels $10,000 in Student Loans, $20,000 for Pell Grant Recipients
Goldman Sachs economists Joseph Briggs and Alec Phillips crunched the numbers and came up with a conclusion that may be startling to both supporters and opponents of the plan — that it won’t amount to much, saying the headlines outweigh the macroeconomic impact .
If all borrowers eligible for the program enroll, it will reduce student loan balances by about $400 billion, or 1.6 percent of GDP. That’s not a given — economists point out that previous loan-reduction programs haven’t had full enrollment.
Economists then used both Education Department data and the Federal Reserve’s Survey of Consumer Finances to estimate the boost to income and consumption. Although lower-income households will see the largest proportional reduction in debt payments, most of them have no student debt. The wealthy, on the other hand, are limited by the income thresholds associated with the relief. Middle-income households will benefit the most.
What is the impact? Payments will drop from 0.4% of personal income to 0.3%. “This modest reduction in debt payments as a share of income suggests only a modest boost to GDP. Compared to a comparable scenario where debt defaults end and normal debt payments resume, our estimates suggest a 0.1 percentage point increase in the level of GDP in 2023, with smaller effects in subsequent years due to the natural maturity of student loans, as well as continued growth in nominal GDP,” they say.
There is also compensation – the end of the student loan repayment pause at the end of the year. “So while the new debt relief program will boost consumption slightly, the combined effect of debt relief and resumption of payments will be slightly negative,” Goldman’s team wrote.
On the hot issue of the day, inflation, the Goldman team also doesn’t expect much of a difference. “Debt forgiveness, which reduces monthly payments, is slightly inflationary in itself, but the resumption of payments likely more than makes up for this,” they say.
There is one more element – a proposal to reduce monthly payments to 5% of income from the current 10%. “All other things being equal, it should reduce the size of many borrowers’ monthly payments when they resume in January, thereby increasing household disposable income while further increasing the federal deficit,” the economists said.
When payments resume in January, they are likely to increase by about $35 billion annually, or about $20 billion less than they would have been.
This would increase the deficit by approximately $400 billion over the next two years. But this will not have a major impact on Treasury issuance, as the government has already funded these loans. Even with the possibility that lawmakers may want a bigger program in the future, Goldman analysts point out that there hasn’t been much of a reaction in fixed-income markets. “This suggests that market participants may treat this as a one-off event that does not imply more debt relief (and higher debt levels) in the future,” they said.
Read it: What Student Loan Relief Means for Your Credit Score, Financial Plans, and Tax Bill