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?