Senator Amy Klobuchar’s Expansive Student Debt Plan

During the New Hampshire primary, Senator Amy Klobuchar finished strong in third place. So as a plausible candidate for President, what’s her plan for student loans?

Despite Klobuchar's reputation as a moderate, her plan for student loans is extraordinarily generous for borrowers. It would lower government interest rates, expand Public Service Loan Forgiveness (PSLF) and replace undergraduate student loans with grants.

Though not as expansive as Senators Warren and Sanders, Klobuchar's student debt plan would still likely cost tens of billions annually. 

Find out more about her plan's major changes and how they would impact borrowers.

1. Refinancing federal student loans to a 3% interest rate

In the Democratic debate for President back in July of 2019, Sen. Amy Klobuchar said that she wants to refinance all federal student loans to an interest rate of approximately 3%. 

This is essentially a return to the student loan policy of the mid 2000s. 

The big difference of course is that the cost of school was far cheaper back then. The problem of unlimited borrowing under Grad PLUS and Parent PLUS was also not on the radar. 

What rates do borrowers currently have?

Today, some borrowers still have ultra low interest loans on extended and 30 year repayment plans. Some rates are as low as 2% or below. 

But most of the $1.6 trillion in federal student loan debt sits at approximately a 6% interest rate. So refinancing to 3% would cut borrowers’ interest costs in half. 

Interest rates can greatly impact repayment strategies.

When you have such a low interest rate at 2%, you might rationally hold onto your student loan debt. And earn more by investing money in stock and bond funds. Higher interest rates can quickly add to your loan principle and make pay off more difficult. 

The cost of lowering federal interest rates

Of course the cost of such a plan could be estimated at the difference in the interest rate times the amount of loans that exist. 

6% minus 3% times $1.6 trillion equals a potential cost of $48 billion annually. 

Perhaps the cost would be lower than that as students might be more inclined to repay their loans. Instead of leaving them in default as 10% of borrowers currently do.  

Would Republicans go along with this plan? It’s unlikely.

Since many Republican Senators want to reduce the government's role in financing higher education, refinancing loans to below market rates would not have their desired effect. Instead it will most likely increase the federal government's involvement.

2. Drastically expand PSLF programs

Senator Klobuchar co-sponsored the What You Can Do For Your Country Act in 2019. Which aimed to take on the high number of borrowers rejected by loan forgiveness. 

In fact, the bill aimed to fix the 99% rejection rate of PSLF by:

• Allowing borrowers to consolidate FFEL loans into Direct Loans without losing PSLF credit. 
• Make all federal repayment plans qualify for PSLF (including graduated, extended, and other options).
• Eliminating paid ahead status to no longer affect PSLF payment count. The Department of Education and servicers would be required to offer better guidance to borrowers.
• Forgive half of a borrower’s loan after 5 years of service (and the remaining half after the usual 10 year forgiveness plan).
• Help borrowers certify employers automatically and streamline the online application process.

Amy Klobuchar mentioned teacher loan forgiveness several times on the campaign trail. She said they are also deserving of more student loan forgiveness. 

I’d expect the expansion of PSLF programs to coincide with an improvement in the abysmal Teacher Loan Forgiveness Program as well.

3. Replacing undergraduate loans with grants

Millions of students attend community colleges. Senator Klobuchar would make their tuition free. 

Senator Klobuchar also wants to double the amount of Pell grant awards from $6,000 to $12,000.

This is most likely because the limits on Stafford loans are quite low for undergrads. Especially in the first couple years of college. 

By increasing the amount of Pell grant awards, low income students would be able to rely on a larger combination of Pell grants. Leading to a limited need for Stafford loans to finance the full cost of an in-state, public four-year university program. 

Expanding Pell Grants takes on a much smaller role than making all public colleges tuition free. 

More of Senator Amy Klobuchar's student loan changes

Most of the “moderate lane” candidates would likely support the Democratic House's version of Higher Education Act reform called the Aim Higher Act.

This plan would allow borrowers to pay 10% of their incomes for 20 years. And incur no taxation on forgiven debt after making 20 years of payments. 

This hypothetical new income driven plan would be cheaper than today’s Pay As You Earn (PAYE) Plan. Which requires paying taxes on forgiven debt if you do not qualify for the Public Service Loan Forgiveness program. 

Klobuchar's plan would ultimately benefit borrowers

Some borrowers would save a lot of money under a President Klobuchar. 

The cost of funding these reforms is substantial. But likely lower than the price tag of Senator Warren and Sanders student debt plans. 

Did I miss any key parts of Senator Klobuchar’s plan? What do you think of these proposed changes?