Topline
President Joe Biden’s historic plan to forgive up to $20,000 in student loans for millions of borrowers quickly drew criticism for potentially threatening to tack on to inflation that’s already reached a decades-long peak, but new analysis concludes his plan likely won’t hike up prices—and could actually help cool them slightly.
“The headlines are bigger than the macroeconomic impact,” Goldman economists say of the plan to … [+]
Key Facts
In a Thursday note to clients, economists at Goldman Sachs estimated the Biden Administration’s plan to discharge about $400 billion in student loan balances and lower monthly payments would have an only “small” overall impact on spending—boosting gross domestic product by about 0.1% next year and less in subsequent years.
As a result, the forgiveness would have a “similarly small” effect on inflation—one that would be “more than fully offset” by a separate provision that would end the pause on payments that has been in place since the start of the pandemic in January, the team led by chief economist Jan Hatzius said, noting that the overall effect would help lower inflation “slightly.”
“The headlines are bigger than the macroeconomic impact,” they said, adding that middle-income households will receive the biggest income boost from the plan, for which only borrowers with incomes up to $125,000 (or $250,000 for couples) would qualify, while most lower-income households do not have student debt and will therefore not benefit.
The forgiveness will likely boost the deficit substantially, by an amount roughly equal to the amount of student debt forgiven, but the economists don’t expect much of an impact from that either.
In a separate note on Thursday, Bank of America came to roughly the same conclusion—saying the estimated increase in the deficit over the next 10 years is of similar magnitude to the estimated decrease from the Inflation Reduction Act (also only marginal), meaning the course of inflation would likely not be impacted.
Chief Critic
The analysis comes after a wave of criticism arguing the forgiveness plan will drive up spending—and inflation. Larry Summers, a former Treasury Secretary under President Bill Clinton, has been among outspoken detractors. “Student loan debt relief is spending that raises demand and increases inflation,” he said Monday on Twitter.
Key Background
The Department of Education estimates as many as 43 million borrowers may be eligible for debt relief under the plan, including about 27 million Pell Grant recipients, who will be eligible for maximum relief of $20,000. Others will receive up to $10,000. The plan also includes a proposal to implement a cap on repayments at 5% of monthly income—down from 10% currently.
Big Number
$1.6 trillion. That’s how much Americans held in federal student loan debt as of the end of June, according to the Federal Reserve.
Further Reading
Biden’s Student Loan Forgiveness Plan: Here’s Who Benefits Most—And Least (Forbes)
Biden’s Student Loan Forgiveness Plan: Up To $20,000 In Relief, $125K Income Cap (Forbes)
Progressives Praise Biden’s Student Debt Cancellation As GOP And Moderates Voice Concern (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/08/25/student-loan-forgiveness-plan-wont-make-inflation-worse-even-if-it-adds-400-billion-to-deficit-goldman-says/