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).
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?