Student-debt relief isn't the inflation-boosting flub Republicans think it is, Goldman Sachs says

  • Biden's plan to cancel student debt won't have much of an effect on inflation, Goldman Sachs said.

  • The relief only barely lifts borrowers' spending, and the effect will wane after 2023, the bank's economists added.

  • Economists at Bank of America and Moody's Analytics agreed the inflationary pressures are marginal.

It's a terrible time to gamble with policies that could lift inflation even higher.

It's a good thing that President Joe Biden's student-debt forgiveness doesn't do that, according to Goldman Sachs.

The debate over Biden's loan cancelation plan has been fairly straightforward. Democrats argue the move extends much-needed support to struggling borrowers with little downside. The GOP has fervently opposed the measure, saying poses a serious risk of driving inflation higher and forcing the US into a recession.

Those fears are largely unwarranted, Goldman Sachs economists Joseph Briggs and Alec Phillips said in a recent note. The relief, which includes $20,000 of loan cancelation for Pell Grant recipients and $10,000 in forgiveness for non-recipients, will only have a small effect on lifting borrowers' overall spending, according to the team. The relief's effects on inflation will be "similarly small," they added.

The meager effect comes down to how much debt cancelation actually affects borrowers' demand. When stimulus checks hit Americans' bank accounts in 2020 and 2021, many recipients immediately spent large chunks of the cash infusion. That spurred economic activity but widened the gap between supply and demand, in turn contributing to the high inflation households still face today.

Republicans flagged student-debt forgiveness as a similar economic booster. The relief, they claimed, would spark another wave of spending and exacerbate the supply-demand imbalance all over again.

Those fears are unwarranted, the Goldman economists said. Though the forgiveness program is expected to cancel roughly $400 billion in loan debt, the income-boost effect will only lift gross domestic product by 0.1% in 2023 and a smaller amount in the following years, according to the bank.

Since many borrowers will still have some balances left to pay off, student debt payments are only expected to fall to 0.3% of personal income from 0.4%. The debt cancelation is also a different kind of government relief, in that it only forgives debt already taken on and doesn't act as a direct cash infusion. That means, while the program will relieve serious financial pressures for millions of borrowers, it isn't likely to kickstart the same spending spree that stimulus checks did.

Other economists share Goldman's outlook. The near-term outlook for personal spending is "unchanged," analysts at Bank of America said in a note, adding their forecast for inflation is also the same as before.

The impact student-loan forgiveness will have on inflation "will be marginal," Mark Zandi, chief economist at Moody's Analytics, said. While debt cancelation will lift inflation slightly, the resumption of loan payments at the end of the year will counteract that upward pressure. The net effect, then, is "largely a wash," Zandi said in a Wednesday tweet.

Biden's debt forgiveness, then, isn't likely to be the inflation fuel Republicans expected. Economists' encouraging estimates couldn't arrive at a more critical time. Inflation has only just started to ease up after hitting a 40-year high earlier in the year. Prices rose 8.5% in the year through July, according to the Consumer Price Index, down from  the 9.1% year-over-year pace seen through June. August is expected to continue the downward trend, with tumbling gas, car, and commodity prices signaling the one-year inflation rate likely fell again through the end of the summer.

Had Biden's plan revived inflation, the odds of a near-term recession would shoot higher as it would force the Federal Reserve's hand and lead to a more aggressive push to stifle demand. But despite the GOP's student-debt argument, it's more likely the inflation cooldown will continue through 2022.

Read the original article on Business Insider