As President Joe Biden announced on Wednesday plan to forgo federal debt up to $20,000 For millions of borrowers, he sparked a discussion among lawmakers and economists about its impact on the economy.
The program will benefit about 43 million borrowers and lead to the release of about $400 billion in student debt, according to a report released Wednesday by Goldman Sachs. The bank’s team of analysts, led by chief economist Jan Hatzius, estimate that it will reduce student debt payments by 0.4% to 0.3% of personal income for those who go to school. loans, in which middle-income households benefit the most.
According to the report, the real impact of that income increase will be minimal, leading to a national GDP increase of about 0.1% in 2023 and even less in the following years.
There’s also the issue of the end of the pandemic’s loan ban period, according to the report. At the start of the pandemic, the federal government halted collection of student loan payments and imposed a 0.0% interest rate. Those measures now expire at the end of December. Now, borrowers with more debt to be forgiven or those earning more than the program’s $125,000 income limit will need to start. refund.
“Although the new debt forgiveness program will boost consumption slightly, the combined effects of debt forgiveness and payment resumption will be slightly negative,” Goldman’s team wrote. According to the report, even if the broad forgiveness is “mildly inflationary,” borrowers who continue to make payments next year will more than make up.
Goldman analysts aren’t the only ones focusing on the regulatory effect the end of the ban could have. Research firm Capital Economics argues that the forgiveness plan could even have an overall fiscal tightening effect because it, according to a statement shared on Thursday.
Meanwhile, Morgan Stanley economist Sarah Wolfe and research analyst Jeff Adelson acknowledged in a Thursday note that while Biden’s debt cancellation plan represents a large sum, it is unlikely to have a short-term impact on spending.
They write: “The team did not find it to have a large multiplier over the projection horizon given that student loan forgiveness affects long-term planning and spending rather than short-term purchases. term. Instead, ending the ban would likely cause spending to drop in the short term, as people continue to pay off their debts every month.
Bank of America Research agrees that the economic impact of debt forgiveness is likely to be small.
In a report released on Thursday, the bank highlighted two ways it expects debt cancellations to impact consumption. The first is through an increase in household net worth. The second is through increasing disposable income. The bank also doesn’t expect to cause much real change in spending.
“In our view, a significant number of borrowers could see an immediate improvement in net assets,” the bank wrote in its report. However, the actual increase in net worth may be overstated, as some student loan balances ultimately remain unpaid. “As a result, the actual increase in net assets, and thus the potential impulse to spending, is likely to be smaller when taking into account estimates of potentially outstanding balances,” the bank said. write.
Regarding disposable income, Bank of America argued that since the ban goes into effect in March 2020, it is unlikely that Biden’s pardon plan will immediately change the way people use income. their availability.
“The diminishing wealth effect and no change in the short-run path to disposable income leave us unchanged our near-term personal spending outlook,” the bank wrote. “In return, we also keep our growth and inflation outlook unchanged.”
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