Do You Like Donald Trump’s Plan for Student Loan Debt?

October 12, 2017

President Donald Trump recently outlined a new plan to tackle the student loan crisis here in the USA within his proposed 2018 fiscal year budget. With some estimates showing over $2 trillion of total student loan debt, politicians on both sides of the aisle must work together to come up with some common sense solutions that provide relief for those suffering under the massive weight of student loans while not bankrupting our nation. Let’s take a look at the president’s proposals and see how they may affect your situation.

Streamlined Income-Driven Repayment Plans (IDR)

For federal loans, borrowers currently have four different income-driven repayment plans to choose from, with payments ranging from 10% to 20% of a borrower’s discretionary income, with the total length of repayment ranging from 20 years to 25 years (more on those specific plans below).

Under President Trump’s proposal, those four IDR plans would be consolidated to one plan with monthly payments capped at 12.5% of the borrower’s discretionary income. If the borrower makes timely payments for 15 years, the government would forgive any remaining loan balance. This new plan would apply to both federal and private loans. (Currently, only federal student loans are eligible for income-driven plans.)

“Students should not be asked to pay more on the debt than they can afford,” Stated President Trump in Columbus, Ohio. “And the debt should not be an albatross around their necks for the rest of their lives.”

How Does Trump’s IDR Plan Compare to the Current IDR Plans?

Today, the standard federal student loan repayment period is 10 years. For those borrowers who cannot afford the monthly payments on the standard repayment plan, the federal government created income-driven repayment plans to help make student loan payments more affordable. The four available IDR plans are REPAYE, PAYE, IBR, and ICR.

Under the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) income-driven repayment plans, you pay 10% of your discretionary income each month toward your federal undergraduate student loans for 20 years, at which point any remaining balance is forgiven. Under REPAYE, if you have graduate school student loan debt, the repayment period is 25 years before your remaining student loan debt is forgiven.

Under the Income Based Repayment Plan (IBR), you pay 10% of your discretionary income if you’re a borrower on or after July 1, 2014 and must make those payments for 20 years, at which point any remaining balance is forgiven. If you’re not a new borrower on or after July 1 2014, you must pay 15% of your discretionary income (but never more than the standard 10 year repayment plan) and must make those payments for 25 years, at which point any remaining balance is forgiven.

Under the Income Contingent Repayment Plan, (ICR), you pay 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years which is adjusted according to your income. You must make those payments for 25 years, at which point any remaining balance is forgiven. Due to the much higher percentage of income required to be paid, ICR is usually never advisable unless it is your only option.

While Trump’s proposal raises the monthly payment cap from 10% to 12.5% of discretionary income, his proposal forgives the remaining student loan balance much sooner than the current income-driven repayment plans. This change would be a huge gift to borrowers who would qualify under Trump’s proposal but would be a very costly change that has some economists questioning his proposal.

“They [Trump] are way off on the numbers,” said Jason Delisle, a resident fellow at the American Enterprise Institute. “If you are going to give loan forgiveness in 15 years, you’re going to forgive a lot more debt than you’re going to make up for in the form of the higher payments they’re proposing. I don’t even need to run the numbers. It’s so obvious.”

Trump has not provided any cost projections but said the plan will be paid for by lowering federal spending and the savings from reducing defaults on student loans.

Elimination of the Public Service Loan Forgiveness Program (PSLF)

Without providing much detail, Trump’s proposal would eliminate the PSLF, which allows 501(c)(3) non-profit employees, government employees, and some not for profit public service organization employees to have 100% of their student loan balance forgiven after making 120 eligible on-time monthly payments (10 years).

My Thoughts – Don’t Panic.

There are still many questions to be answered about Trump’s proposal (and remember it is just a proposal for now), but we can discuss what we know at this point.

I’m assuming that any major changes that do become law will not impact those currently taking part in IDR plans and/or PSLF. Obviously this isn’t a guarantee as no one can predict what will happen, but Congress usually doesn’t make changes that are retroactive in nature. Changes will hopefully only affect future loans and/or borrowers starting in 2018 and moving forward.

For those that would benefit from the simplification of the IDR plan, it would be nice if you will be able to count past IDR qualifying payments towards the simplified IDR plan.

Trump’s IDR plan would be very appealing to borrowers with private student loans. Right now, only certain federal loans are eligible for the current IDR plans. This is a big deal, because it simplifies the decision to refinance or consolidate student loans.

The potential elimination of the PSLF is terrible news for those currently in graduate schools (or considering professions with high student loan debt upon graduation) who were planning on using PSLF as a strategy to eliminate their student loans.

From a taxpayer perspective, his plan appears to be costly. There is no way to accelerate loan forgiveness (5-10 years sooner than the current repayment plans) without realizing a reduction in loan interest revenue. The government would likely collect less interest from borrowers under Trump’s proposed plan (due to an increase in the number of loans being forgiven).

This dilemma is a bit ironic, because some Republicans previously described Obama’s expansion of income-driven repayment programs as fiscally irresponsible, yet Trump wants to lower the period of repayment even further.

Personally, I think Trump has proposed a reasonable plan to handle outstanding student loan debt. However, it fails to address future student loan debt.

There needs to be reform within higher education that prevents some students from getting into debt in the first place. The government shouldn’t ask taxpayers to forgive billions or trillions in student loans if those loans were irresponsible in the first place. In other words, students probably shouldn’t be borrowing $100,000 to finance an undergraduate degree unless there is a clear path to repayment.

In career fields where employment opportunities are rare or low-paying, students should borrow even less because it will be very difficult to repay those student loans on any standard repayment plan.

I don’t know of a perfect solution that addresses all of these concerns, but changes need to be made at the University level to prevent borrowers from getting into ridiculous loan situations (where the only hope for debt repayment is through public loan forgiveness).

Do you like Trump’s proposal, or are you hoping to see something drastically different?

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10 Comments on "Do You Like Donald Trump’s Plan for Student Loan Debt?"

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Christian
Christian
I think no matter there can’t be a real solution for the problem – because studying will always cost either the student or the society as a whole. I am from Europe and in my country I can study for free… well it looks like that at first glance. But the reality is, we have some of the highest tax rates in the world and starting from a salary of only a bit more than 50K $ you fall into the highest tax bracket. So you can choose between to systems/worlds: You either pay the fees directly to your university… Read more »
Christian
Christian

And I want to add that the overall cost of university programs are pretty much the same in Europe as in the US. The society has to pay over 200.000€ for the tuition of a medic in Central Europe, which is quite close to the fees in the US.

Emily
Emily

In some places, tuition is variable by degree program as well as by institution (so an art degree and a tech degree would cost different amounts at the same school). Applying something like this to the university system could allow a slow scaleback of tuition costs and let debt be comparable to potential income of the degree.

Buy, Hold Long
Buy, Hold Long

I think this is a great idea. We have something similar in Australia. Once you earn over a certain amount then your student loan starts to get taken out as extra tax, so you don’t really see it going. This takes some time to pay off but it is only indexed at the current CPI, which for now is quite low.

Syed
Syed

Student loan debt is a big problem, and ultimately it’s due to rapidly increasing college tuition. This is the root of the problem, and I don’t see it being addressed anytime soon. The loan forgiveness sounds nice, but I believe the student debt issue became a huge problem once they increased the interest rates to 6%+. Keeping interest rates and tuition low will be the key to solving this. But there is too much money to be made by banks.

LT
LT
I’ve been enrolled in PSLF since 2013 and have more or less remained in government work the first few years of my career to eventually benefit from it. I always knew it was a program in political crosshairs and would be even more so when the first round of PSL forgiveness occurred, no matter how few students benefited in year 1 of forgiveness. Like other enrollees, I have my fingers crossed for a grandfather clause if the program is killed. Gaining acceptance into the program was a battle. It took a call to my U.S. senator to go to bat… Read more »
Yuppie Wallet
Yuppie Wallet
Timely article! Completely agree that reform for higher education needs to be a top priority. Giving an 18-year-old access to undiscardable debt is really a dangerous thing as shown by the thousands and thousands of dollars that the average college graduate owes when he finally walks out the door. Not only that reform needs to work both ways as these for-profit schools really take advantage of students. For example, I have seen my state education tuition price double since I have graduated. What has to cause the prices to rise THAT high when income has not kept up. Either way,… Read more »
Erik
Erik

Interesting analysis. I think future student debt should be a concern of those taking on student debt. I like the plan, even if it does cost taxpayers.

You can’t fix it all at once. Simplifying repayment plans is a good thing. Next, it’s education on personal finance and keeping tuition manageable.

Thanks for the post, have a good one

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