This article also appeared in Forbes.
If President-elect Donald Trump implements his proposed student loan plan, there may be good news on the horizon for millions of student loan borrowers.
On October 13, Trump proposed an income-based repayment plan that allows borrowers to cap their monthly student loan payments based on their income and then have their student loans forgiven after a certain period of time.
Under Trump’s plan, if you are a student loan borrower, your monthly student loan payments would be capped at 12.5% of your income. After 15 years of monthly payments, your remaining student loan debt would be forgiven.
“Students should not be asked to pay more on the debt than they can afford,” Trump said then in Columbus, Ohio. “And the debt should not be an albatross around their necks for the rest of their lives.”
Student Loan Repayment: The Status Quo
Today, the standard federal government student loan repayment period is 10 years. For those borrowers who cannot afford their monthly student loan payments, the federal government created income-driven repayment plans to help make student loan payments more affordable than the standard 10-year plan.
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 on your federal undergraduate student loan 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.
Trump said he would combine the existing repayment plans into a single plan to make it less confusing for borrowers. While Trump’s proposal raises the monthly payment cap from 10% to 12.5% of income, his proposal forgives the remaining student loan balance five to 10 years sooner than the current income-driven repayment plans. He plans to pay for his student loan plan by reducing federal spending.
The Fate of Public Service and Teacher Loan Forgiveness
The federal government currently provides student loan forgiveness for public servants and teachers who meet certain qualifications, including a requisite number of monthly student loan payments. Public servants, for example, can have 100% of their student loans forgiven after 120 eligible on-time monthly payments.
If Congress were to eliminate Public Service Loan Forgiveness (and place all borrowers into a single income-based repayment program), for example, existing borrowers likely would be grandfathered in, since they borrowed with the expectation of entering public service and qualifying for loan forgiveness. According to Mark Kantrowitz, publisher of Cappex.com, Public Service Loan Forgiveness alternatively could be restricted by capping the amount of loan forgiveness, restricting the eligible fields or establishing a means test for forgiveness.
Other Potential Changes To Student Loans
With respect to other federal student loan policies, expect more details to emerge from Trump’s nominee for Secretary of Education, Betsy DeVos, as well as congressional leaders such as Sen. Lamar Alexander (R-TN), chairman of the Senate Health, Education, Labor and Pensions Committee, and Rep. Virginia Foxx (R-NC), incoming chairwoman of the House Education and Workforce Committee.
- Risk sharing between the federal government and universities with respect to students who default on their student loans
- Potential reduction of the federal government’s role in student lending and a corresponding increase in the role of private lenders
- Amount of “profit” the government generates from student loans, which may result in a reduction of interest rates for federal student loans
Top 5 Questions and Answers
Given Trump’s student loan proposal, what is the impact to you as a student loan borrower and what action steps can you take now?
Here are five questions and answers:
1. Will I save more money on my student loans under Trump’s plan compared with the current income-driven repayment plans?
All else equal, Trump’s current proposal for borrowers to pay 12.5% of income for 15 years, if enacted into law, should save you more money than the current federal government repayment programs (PAYE and REPAYE), which require 10% of discretionary income per year for 20 or 25 years.
2. How do I apply for student loan forgiveness?
You don’t have to wait for Trump’s student loan plan to be implemented to apply for student loan forgiveness. You can sign up now for REPAYE or other repayment plans at studentloans.gov. There are certain criteria for each income-driven repayment plan and you have to recertify your income each year. Unfortunately, Parent PLUS loans are not eligible for either income-driven repayment plan.
3. Does student loan forgiveness under Trump’s plan mean I will not owe any more money after my student loan is forgiven?
Under current repayment plans, if you work in the private sector and have a remaining student loan balance at the end of your repayment period, then you may be required to pay ordinary income tax on any student loan amount forgiven. Therefore, your student loan debt is not completely forgiven. Rather, your education debt is exchanged for tax debt. If you work in the public sector and have a student loan balance at the end of your repayment period, then you are not taxed on any student loan amount forgiven. Trump has yet to indicate whether he supports the same policies.
4. Will Trump’s plan lower my monthly student loan payment?
Trump believes that the federal government should not profit on student loans, but has not indicated whether the current interest rate for student loans will be lowered. However, you don’t have to wait for Trump’s student loan plan to take effect to get a lower interest rate on your student loans. You can refinance today with private student loan lenders who can offer lower interest rates than the federal government for borrowers with strong credit (or who have a qualified co-signer).
5. What are the benefits and risks to income-driven repayment plans?
There are benefits and risks to income-driven repayment plans, including PAYE and REPAYE.
The benefit: you save money upfront from lowering your monthly student loan payment or extending the repayment period.
The risk: you will pay more interest over time because lower monthly payments means you are reducing less principal each month. You also may be required to pay ordinary income tax on the loan amount forgiven.