President-elect Joe Biden is facing mounting pressure from progressives to cancel student loan debt on his first day in the White House – but doing would do little to boost the nation's pandemic-stricken economy, according to a new analysis.
If Biden follows through on his campaign pledge to forgive up to $10,000 in federal student loan debt for every borrower, it would add less than 0.1% to the nation's GDP annually over the next decade, according to a Goldman Sachs analyst note sent to clients on Monday. During that same time span, it would add just 43 cents in real GDP for each dollar of debt forgiven.
The proposal would cost an estimated $300 billion.
The Goldman analysts noted that most of the $1.6 trillion in federal student loans held by more than 43 million borrowers belongs to middle- and upper-income households, who would most likely save the money rather than spending it.
"These households likely have signiﬁcant earning potential and are less likely to be resource constrained, so eliminating their loan payments might not generate a large spending response," the analysis said.
Canceling student loan debt could also carry "potentially significant tax implications that could do more harm than good" to borrowers, Goldman said. Debt forgiveness is typically treated as taxable income to the borrower -- which could leave some Americans on the hook with a hefty tax bill.
For instance, forgiving $50,000 in student debt for a borrower who earns $100,000 annually would leave them with a tax bill of about $12,500 in a single year, "probably more than the entire tax bill on their other income," Goldman said.
Biden has endorsed canceling some student loan debt "immediately" upon entering the White House, reiterating his support for a provision of the HEROES Act, which the Democrat-controlled House passed earlier this year.
Under that legislation, economically distressed borrowers would immediately have $10,000 in student debt forgiven. The government would also cover monthly loan payments for people with private student loans until September 2021 and forgive $10,000 of their debt.
But progressive Democrats are urging Biden to move further left on the issues: Sens. Chuck Schumer, D-N.Y., and Elizabeth Warren, D-Mass., have urged the incoming president to bypass Congress and cancel $50,000 in loan debt per borrower on his first day in office.
They maintained that Biden could use existing executive authority under the Higher Education Act to order the Department of Education to “modify, compromise, waive or release” student loans. A broad cancellation of student loan debt would free up about $200 to $300 per month for millions of Americans, according to a joint op-ed published by the senators last week.
“We have come to the conclusion that President Biden can undo this debt, can forgive $50,000 of debt the first day he becomes president," Schumer said Monday, speaking to reporters outside of his Manhattan office. "You don’t need Congress. All you need is the flick of a pen."
Doing so would cost about $800 billion, according to the Goldman note.