As the debate over federal student loan forgiveness heats up ahead of President-elect Joe Biden’s inauguration, Goldman Sachs forecasts that even substantial student debt relief would only deliver a small boost to economic growth, though the cause has been championed by progressive lawmakers and some economists as a means to boost economic activity while combating racial inequities and providing pandemic relief.
In a note to clients on Monday, Goldman said it estimates that forgiving up to $10,000 in federal student loans for every borrower would add less than 0.1% to the nation’s gross domestic product annually from 2021 through 2030, and over that timespan, it would only add 43 cents in real GDP for each dollar of debt forgiven.
The cost of forgiving up to $10,000 per borrower would be around $300 billion, or roughly 1.6% of GDP, Goldman estimates, while forgiving up to $50,000 could cost roughly $800 billion, though Biden has never promised that degree of student loan forgiveness.
Most of the nearly $1.6 trillion in federal student loans to more than 43 million borrowers is held by middle- and upper-income households, who’d most likely save and not spend much of the money from loan forgiveness, Goldman notes, echoing concerns among critics who say that student loan forgiveness would disproportionately benefit individuals with higher incomes.
Additionally, student loan forgiveness could come with “potentially significant tax implications that could do more harm than good” to borrowers in the near term, Goldman says, noting that debt forgiveness is usually treated as taxable income that could force taxpayers to pay roughly 20% of the debt ultimately forgiven in taxes barring a legislative or administrative change to 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 out over many years “due to the lack of interest and principal payments” if the government forgives loans through payment reductions over several years, Goldman notes.
If loans were forgiven immediately, however, “the Treasury’s financing needs might actually decline,” says Goldman, “as tax payments on the forgiven amounts would likely more than offset the lack of scheduled loan payments.”
President-elect Biden ran on a bold–but costly–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’s also declared that Congress should “immediately” cancel $10,000 in federal student loans for every borrower as a result of the Covid-19 pandemic, as have 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 inequities since minorities, on average, take on more student debt than white Americans. Additionally, research from the Urban Institute found that borrowers with lingering student debt (dating back to the mid-1990s or earlier) tend to default in higher rates, have lower credit scores and live in lower-income neighborhoods than other borrowers.
“There are several reasons to be skeptical that forgiving student debt would provide a large boost to consumption,” a group of Goldman analysts led by Jan Hatzius said on Monday. “Most student debt—and the vast majority of debt with a large balance—is held by households with a graduate or professional degree that have high earnings potential and are less likely to be resource constrained.”
“Last time our economy crashed, this country made a devastating mistake: we turned our backs on students and families to bail out the giant banks,” Senator Elizabeth Warren (D-Mass.) said when introducing a plan for student loan cancellation in March. “Student loan borrowers—especially students of color—never fully recovered from that economic punch to the gut. This time around, by cancelling student debt payments for millions, we will fix the mistake that still holds back a generation of people and dragged down our economy, and create a real, grassroots stimulus to help see us through this crisis.”
What To Watch For
Relief in the new administration. Control of the Senate depends on the Georgia runoffs slated for January 5. Barring victory by both Democratic candidates, Goldman says a divided government still appears most likely for the next two years—meaning student loan forgiveness would probably need to come through executive action. None of the leading stimulus proposals currently in Congress include student debt forgiveness measures, Goldman further notes, and President-elect Biden hasn’t committed to using an executive order to push through student loan forgiveness.
Many economists have warned that student loans, which last year became the largest source of non-mortgage debt in the nation, have created a massive debt bubble akin to the subprime mortgages that sparked the Great Recession. Citing Moody’s Analytics, the Wall Street Journal reported that private lenders lost $535 billion on those bad subprime-mortgage loans–just 23% more than the U.S. federal government is now projected to lose from its “toxic” student loan debt, meaning loans unlikely to be repaid with interest.