Understanding the Implications of President Trump’s Student Loan Repayment Plan
Some 45 million American college students owe upwards of $1.6 trillion in combined student debt. This makes student debt the second largest form of consumer debt after mortgages. Repaying federal student loans is something of a lengthy process in the US; therefore, there are not one, but eight different repayment plans students can choose from.
However, President Trump is planning to introduce a unified repayment plan for graduates that choose one of the four income-based repayment plan student loans currently available.
Trump’s idea to simplify income-driven student loan repayment plans was first mooted back in the midst of the 2016 presidential campaign, as he sought to appeal to the next generation of voters. But would Trump’s proposed federal student loan repayment program actually work better than the existing infrastructure?
Let’s take a look at the differentiators between the existing repayment structures and President Trump’s proposals.
Trump’s plan to cap federal student loan repayment at 12.5%
As part of President Trump’s 2020 budget plan, he seeks to cap federal student loan repayments at 12.5% of a graduate’s discretionary income. Discretionary income is assessed by the federal government as an individual’s funds that can be spent on non-essential expenses or saved for the future.
This figure is calculated by determining the federal poverty guideline for a graduate’s location, before multiplying that figure by 1.5 and subtracting that end number from their adjusted gross income.
At the time of writing, there are four income-based federal repayment plans:
- Pay As You Earn Repayment Plan (PAYE)
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
Trump’s proposals would see all four plans listed above scrapped in favor of a single income-driven repayment plan. These proposals would still see borrowers choose whether they wish to enroll in income-based repayments. However, delinquent borrowers would be automatically enrolled and be legally obliged to provide data on their income for many years.
If the proposals are eventually approved, President Trump’s plan would only be applicable to new student loans provided on or after July 1, 2020.
How similar is Trump’s plan to the existing REPAYE plan?
|Trump’s student loan plan:||REPAYE:|
|Proposes to introduce 12.5% repayment cap for all borrowers enrolled in income-based repayment||Repayment plan capped at 10% of a borrower’s discretionary income|
|Borrowers earning $20,000 a year would pay $57 per month, on average||Borrowers on the REPAYE plan earning $20,000 a year would pay $51 per month, on average|
|Borrowers with discretionary income of $40,000+ would pay $275 per month, on average|
Borrowers on the REPAYE plan earning $40,000+ a year would pay $232 per month, on average
What is the loan forgiveness of Trump’s plan?
Existing income-based repayment plans like REPAYE tend to forgive remaining student debt after 20 years of regular repayments. Graduates that earn $20,000 per year will get 20 years to pay off their federal debt. This number will fall to 15 years for those in the same income bracket with Trump’s new repayment plan.
This number will drop even further for those earning $40,000+ per year, with borrowers given less than nine years to pay off their federal debt in its entirety.
Trump’s budget proposal for student loan repayments states that although the loan forgiveness timetable would decrease to 15 years for full repayments for undergraduate loans, the timetable would extend to 30 years for graduate student loans.
President Trump also wishes to close the Public Service Loan Forgiveness program, which gives borrowers the chance to end their federal student loans by working for a minimum of ten years in qualifying sectors.
What do the other 2020 presidential candidates want for student loan debt?
Several candidates for the US presidency in 2020 have suggested new approaches to student loan debt forgiveness. Some are more extreme than others. For example, Senator Bernie Sanders wishes to forgive the remaining $1.6 trillion of student loan debt from the moment he takes office, including federal and private student loans.
Mr. Sanders claims this would be paid for by a new tax on financial transactions i.e. stock, bond and derivatives trades, which could raise over $2 trillion in the next decade.
In addition, Democrat Senator Elizabeth Warren, who is also a presidential candidate for 2020, recommended legislation last year to cancel student loan debt for over 95% of US borrowers. She would cancel $50,000 of student loan debt for every student with a household income of less than $100,000 and clear substantial debt for each student with a household income between $100,000-$250,000. She has confirmed that income tax would not be assessed on any student loan debt that’s canceled.