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

Last updated on March 1st, 2017

President Donald Trump recently proposed a new plan to handle student loan debt. Under his plan, the government would cap monthly payments 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.

Trump’s plan would consolidate the current repayment programs in place, resulting in a single new plan. This new plan would apply to both federal and private loans. (Currently, only federal student loans are eligible for income-driven repayment plans.)

“Students should not be asked to pay more on the debt than they can afford,” Stated 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 Plan Compare?

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.

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.

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 is a 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.

It’s also unclear if Trump intends to eliminate the Public Service Loan Forgiveness program, which allows non-profit employees to have 100% of their student loans forgiven after 120 eligible on-time monthly payments (10 years).

My Thoughts

There are still many questions to be answered about Trump’s proposal, but we can discuss what is known.

From a borrower’s perspective, Trump’s plan looks like a winner. The new plan would apply to federal and private student loans. This is a big deal, because it simplifies the decision to refinance or consolidate student loans. Under the new plan, the maximum monthly loan payment is capped at 12.5% of discretionary income, which is manageable and very similar to the current income-driven repayment plans. However, borrowers could have their loans forgiven after 15 years of payments, instead of 20-25 years under current law.

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

Comments
  1. Reply

    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 like in the US or you pay indirectly through higher taxes.

    • Reply

      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
    • March 5, 2017
    Reply

    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.

  2. Reply

    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
    • March 4, 2017
    Reply

    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
    • March 3, 2017
    Reply

    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 for me thanks to extreme admin. resistance from the private company handling it. If the 15 year forgiveness program for all students moves forward, though, I’m done with government work and I assume many other young people with the kinds of tech. talent so sorely needed in gov’t agencies will follow suit. The work is frustratingly slow-paced and bureaucratic (no surprise there) and gov’t agencies at all levels will lose talent and remain dysfunctionally stuck doing things the way they have for the past 25 years when the current old heads who joined the workforce in early 90’s and decided to get comfortable predictably resist any change now. A move to private sector will raise salaries significantly for exiles of PSLF. I won’t think twice to make the move if this 15 year forgiveness program becomes reality.

  3. Reply

    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, I think baby boomers are in a rude awakening when they come to retire and want to sell their homes but no millennials have any cash because they are paying off their student loans.

      • Jacob
      • March 2, 2017
      Reply

      Thanks for sharing your thoughts Yuppie.

    • Erik
    • March 1, 2017
    Reply

    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

      • Jacob
      • March 1, 2017
      Reply

      Thanks for the comment.
      I’m not sure I agree with your second statement. Given the existing research on the failures of financial literacy education, it seems unlikely that basic personal finance education will make a big impact on borrowing decisions for persons aged 18-22.

 

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