The Biden administration’s decision to cancel billions of dollars worth of student debt has caused a bit of an internet tantrum lately. But does it matter economically as much as some people claim?
Not really, according to Joseph Briggs and Alec Phillips of Goldman Sachs. Here are the key points they made in a report on the subject overnight.
The Biden Administration has announced three student loan policy changes: (1) federal student debt forgiveness up to $10k per borrower—and up to $20k per borrower in many cases—among households with income up to $250k; (2) a continuation of the pause on current student loan payments through year-end, after which payments will resume; and (3) an income-driven repayment plan that would cap monthly payments to 5% of a borrower’s discretionary income (from 10% under an existing program).
The program looks likely to discharge around $400bn (1.6% of GDP) in student loan balances. We estimate that the debt forgiveness program would reduce student debt payments from roughly 0.4% to 0.3% of personal income, with middle-income households disproportionately benefiting from the reduction in debt payments.
The aggregate effects from such an income boost would be small, however, with the level of GDP increasing by about 0.1% in 2023 with smaller effects in subsequent years. We would expect the effects on inflation to be similarly small.
However, the end of the payment pause and the resumption of monthly payments looks likely to more than fully offset the small boost to consumption from the debt relief program. It is unclear how many borrowers will take up the new income-driven repayment option or when it will become available, but lower monthly payments under that program could further reduce monthly payments next year.
While the program will ultimately increase the level of federal debt by roughly the amount it reduces student loan balances, the only near-term impact on Treasury cash flows will be a roughly $35bn annualized increase in student loan payments next year as payments resume, but at a level somewhat lower than the pre-pandemic trend due to debt relief.
Still, we doubt that this is going to alter the Discourse.