Student loan forgiveness 'implies only a modest boost to GDP,' Goldman says

President Biden's student loan forgiveness will have a negligible impact to economic growth, says Goldman Sachs.

"This modest reduction in debt payments as a share of income implies only a modest boost to GDP," Goldman Sachs chief economist Jan Hatzius wrote in a note to clients. "Relative to a counterfactual where debt forbearance ends and normal debt payments resume, our estimates imply a 0.1 percentage point boost to the level of GDP in 2023 with smaller effects in subsequent years due to the natural maturation of student loans, as well as continued growth in nominal GDP."

While student loan relief may not trigger a GDP pop, there is no question it will help ease the financial pressure on many households.

GDP will only get a modest lift from the student debt relief scheme, estimates Goldman Sachs.
GDP will only get a modest lift from the student debt relief scheme, estimates Goldman Sachs.

The plan revealed on Wednesday forgives $10,000 in student debt for individual borrowers who make less than $125,000 annually and married couples or heads of households who make less than $250,000. Eligible individual borrowers who received a federal Pell Grant as an undergrad will have to up $20,000 in student debt forgiven.

Other's on the Street also chimed in.

"Even if the inflationary impact is muted, the loan forgiveness policy still comes with significant drawbacks; the moral hazard problems around one-off debt forgiveness with no further reforms strike us as severe, the policy is somewhat regressive, and the government opportunity costs are real," Evercore ISI strategist Tobin Marcus wrote in a note. "But we do not see this announcement as materially changing the macroeconomic outlook."

US President Joe Biden announces student loan relief on August 24, 2022, in the Roosevelt Room of the White House in Washington, DC. - Biden announced that most US university graduates still trying to pay off student loans will get $10,000 of relief to address a decades-old headache of massive educational debt across the country. (Photo by OLIVIER DOULIERY / AFP) (Photo by OLIVIER DOULIERY/AFP via Getty Images)
US President Joe Biden announces student loan relief on August 24, 2022, in the Roosevelt Room of the White House in Washington, DC. (Photo by OLIVIER DOULIERY / AFP) (Photo by OLIVIER DOULIERY/AFP via Getty Images)

Student loan repayment was also frozen again, with repayments starting in January 2023, and Hatzius thinks the restarting of payments in 2023 will offset the benefits from the debt relief program.

"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," Hatzius added. "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."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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