The Trump Student Loan Plan – What It Could Mean For You
The Trump Administration released a series of education reform proposals this week that, if enacted, could have a substantial impact on college-bound students and student loan borrowers. The White House released the proposal as Congress prepares to reauthorize and amend the Higher Education Act.
Both the Administration and Congress are grappling with a huge and growing problem: Outstanding student loan debt that now exceeds $1.5 trillion dollars.
According to U.S. Secretary of Education Betsy DeVos,
- 43 percent of student loans are either in default, more than 30-days delinquent, or “negatively amortized.” That means that payments aren’t even covering the interest on the loans.
- Only 24 percent of outstanding loans are currently having principal paid down.
“American students need to understand that they are digging themselves into a deep financial hole and taxpayers deserve fiscal restraint because they are the ones that could ultimately be left holding the bag,” said the Secretary at a March 28 Senate Appropriations Committee hearing.
In the Trump Administration’s new 10-point plan to reform the Higher Education Act, the president had a number of proposals that would directly affect higher education and student loan borrowers:
Reduce the amount students (and their parents) can borrow
Restrain runaway tuition inflation by reducing the amount of federally-subsidized student loans. The administration believes that too much money flowing into student’s hands via student loans is contributing to runaway tuition increases – a belief supported by research from the Federal Reserve. However, some liberal groups dispute this finding, and Democrats oppose the restrictions, saying they would unfairly impact students from poorer families.
The Administration’s proposal specifically targets the PLUS and Grad PLUS loan programs. Currently, dependent undergraduate students can borrow up to $31,000, and independent undergraduate students can borrow up to $57,500. However, parents are able to take out an unlimited amount in loans under these programs with a federal subsidy. The Administration proposal did not define their proposed borrowing cap. But Congressional Republicans have already proposed limits at $28,500 for graduate students and $12,500 for undergraduates, in the text submitted for the PROSPER Act.
The plan would not affect private student loans. However, it may create opportunities for private borrowers to fill the vacuum left by scaled back federal loan programs. This would likely result in higher interest rates for students, and possibly fewer consumer protections for borrowers.
Simplify income-based repayment plans
The President proposes eliminating the five different income-based student loan repayment plans, and replacing them with a single income-based repayment program that caps monthly payments at 12.5% of the borrower’s discretionary income.
The President’s plan is similar in some ways to a proposal put forth by Tennessee Senator and former Secretary of Education and university president Lamar Alexander.
Last February, Senator Alexander proposed eliminating all the current income-based repayment programs, instead offering two options: A repayment schedule based on a payment that does not exceed 10% of a borrower’s discretionary income. This proposal would include payment forbearance while borrowers are unemployed. Missed payments while in unemployment forbearance would not be reported to credit bureaus, thus protecting the borrower’s credit.
Lamar also proposes an alternative in which payments are set to completely pay off the debt in ten years of equal payments. This would mean higher payments in most cases – but the borrower would be out of debt much faster and would potentially save thousands in interest over the life of the loan.
Alexander further hopes to reduce student loan defaults by having employers subtract minimum student loan payments from their paychecks, just like they deduct income and Social Security taxes. This could also potentially be a part of any eventual Higher Education Act bill passed by Congress this year.
Forgive undergraduate student loans after 15 years
The Trump student loan plan calls for allowing unpaid federally-guaranteed student loan balances after 15 years of on-time payments for undergraduate loans. This is similar to the President’s proposal last year, except last year, the President also called for graduate student loans to be eligible for forgiveness on the balance of their loans after 30 years of on-time payments. This year’s White House proposal does not mention forgiveness for graduate loans at all – only for undergraduate loans.
Whether Congress authorizes a 30 year forgiveness period for graduate loans or none at all, this is potentially significant because it would greatly reduce the value of the so-called “doctor’s loophole.”
Eliminate the Public Service Loan Forgiveness Program
This would reduce incentives for borrowers to work in lower-paying government service and non-profit organizations. It would likely disproportionally affect people in education, health care and social services. Currently, the program offers forgiveness on the remaining balance of student loans if the borrower works in a qualifying public service job for ten years. Borrowers also have to make all their monthly payments on time. Under this proposal, however, all undergraduate loans would be forgiven after 15 years. This includes those who work for non-profits and public service organizations.
The Trump student loan plan may make it more difficult for these organizations to recruit people to work in underserved communities. They would probably have to increase salaries on offer to compensate for the lack of federal loan forgiveness, or offer loan payment assistance programs of their own.
But much of the benefit of the Public Service Loan Forgiveness program has been a mirage, as far as borrowers are concerned: Though the program started 12 years ago, in 2007, the program has thus far rejected 99% of applicants. That is, hardly anybody who thinks they qualify for forgiveness has actually received any balance forgiveness at all. Many of them are only finding out after 10 years of faithful payments that they were in the wrong repayment program all along. These borrowers are only finding out now that none of the last decade’s worth of payments counts toward the requirement.
Will it affect those already enrolled?
Those currently enrolled in an income-based repayment program eligible for public service loan forgiveness can probably rest easy. In the past, the Administration has been very clear that their intent was to grandfather in already funded loans. The more restrictive rules would apply only to new loans.
Require colleges to share in the risk
The President is calling for reforms that do more to hold colleges accountable for students who default on student loans. The Administration believes that too many students are enrolling in programs that don’t prepare them for today’s job market. Consequently, they have trouble paying back student loans. More than 10 percent of existing student loans are in default status, according to information from the U.S. Department of Education. The problem is particularly acute among former students of private for-profit schools. The default rates among private for-profit school graduates is a much higher 15.6 percent.
Under the Trump student loan plan, the government would penalize schools for high default rates among graduates. But the proposal does not include specifics as the Administration expects to work with Congress on hammering out the details.
Expand Aid Eligibility for Shorter-Term Programs
The Trump Administration advocates expanding federal student aid for shorter-term programs like professional certificates and credentials in high-demand fields. This would allow more students to enroll in in-demand non-degree programs. Expanding aid to non-degree, shorter-term programs would make it easier for workers to train and retrain according to demand.
Extend Aid to Incarcerated Students
The Trump Administration also proposed extending aid to students currently incarcerated. This would allow prisoners eligible for release to receive Pell grants. Currently, those currently serving time in prison are not eligible for Pell aid. The Administration hopes to improve employment outcomes for these individuals and reduce the chances they will reoffend and wind up back in jail.
The Trump Administration proposals are just that – proposals. They have no effect until Congress actually passes a law. But chances are good that Congress will pass something this year. Senator Alexander has announced he will not seek re-election in 2020, and is working hard to get something passed. Mr. Trump, Sen. Lamar Alexander and the Democrats have all expressed a desire to increase funding for historically black colleges and universities. There is also broad bipartisan support for making colleges share in the risk when large numbers of their students default.
Some aspects of Alexander’s plan and the President’s proposals will encounter resistance. Especially the Trump Administration proposal to cap PLUS and Graduate PLUS loans and place other curbs on student borrowing. These proposals may not make it through the Democrat-controlled House of Representatives, except perhaps in a very watered-down form.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.