Regardless of who won the election, student loan policy was going to change somehow. Predicting student loan policy based on this election has nothing to do with political preferences. I only seek to determine how to best prepare my clients for policy change so that they can save as much money as possible.
We are currently on an unsustainable path with total student debt of Americans sitting at $1.45 trillion. Student loans will soon surpass both credit card debt and auto debt combined. 10 years ago, people were not really even talking about student debt as a national policy crisis. Now that the election is decided, here’s how President Trump affects student loans. If you’d like a free student loan calculator that models Trump’s student loan proposal, click the button below.
Expect Fewer Federal Repayment Program Benefits in the Future under Trump
Trump does not really have a detailed student loan policy. That said, we have to piece together what his views would be towards government payment programs from statements he’s made on the campaign trail. He recently stated that he would support a program that caps payments at 12.5% of income and forgives the balance in 15 years. Such a program would be far more generous than current repayment plans.
I do not expect that to pass a Congress fully controlled by Republicans. As recently as March 2015, the GOP sought to severely restrict the PAYE program, which limits payments to 10% of discretionary income and allows for taxable loan forgiveness after 20 years of payments. The bill also called for the elimination of the PSLF program for all new borrowers. Notably, they would have left current participants in PSLF untouched.
Therefore, even if Trump supported a new income based repayment plan, which I don’t believe he actually does, it has little chance of passing. Expect fewer loan repayment options going forward. The IBR plan that requires payments of 15% of discretionary income with forgiveness in 25 years is likely to move back to being the default plan over the next couple of years.
The Public Service Loan Forgiveness Program is Probably in for Major Changes
As I mentioned earlier, the GOP has already sought to eliminate the largest tax free student loan forgiveness loophole in history. If you’re already submitting the PSLF employment certification letter annually as I recommend to clients, then you’re probably OK. The reason I’m pretty sure PSLF will change is that Democrats want to limit the program too. President Obama sought to cap the PSLF program benefit at a maximum of $57,500 in 2015.
The Republican plan is to eliminate Public Service Loan Forgiveness entirely. The Democratic plan is to cap it so that it only helps borrowers with relatively small loan balances from undergrad. Either way, that predicts a future end to doctors using PSLF to forgive hundreds of thousands of dollars in med school loans tax free.
The government probably cannot make changes to the loans already in existence, as agreements specify the details of the PSLF program in the contracts for borrowing. If they tried to change the terms for current borrowers, that would be viewed as a contractual violation and would be grounds for a lawsuit. That’s why I think only future borrowers will be impacted by this.
Private Lending and Refinancing is Going to Surge
I help a lot of people with old 8% to 10% private student loans refinance to much lower rates. They didn’t have a cosigner when they went to school, so they got slammed by whatever sky high rate the Wells Fargo’s of the world wanted to charge them. After they graduate and get an income, they qualify for much lower interest rates because they have stronger creditworthiness.
The federal government essentially nationalized the student loan industry under President Obama. Virtually all loans now come directly from the federal government at the point of origination. There is currently a huge private refinancing industry that focuses on borrowers after they take out the debt. The government sets the floor on the interest rates. The attractive risks such as high income earners with good debt to income ratios get offered lower interest rates by private investors once they get jobs.
I would expect a return to the student loan market by private banks with new legislation. Paired with the reduction of federal government repayment programs, this will lead to a greater disparity in interest rates. We will see much higher borrowing costs for less economically viable degree programs.
No Matter How President Trump Affects Student Loans, Make a Plan and Control What You Can
The federal government is a massive behemoth. No matter who controls the Presidency, policy takes many years to change. The guidance I give to clients is the exact same as it was last week. Most current borrowers’ student loans will be unaffected by President Trump.
For future borrowers, I would suggest being very careful before signing onto a degree program that will leave you with a high debt to income ratio. The new President and new Congress will likely scale back public repayment programs. Therefore, anyone who graduates with a debt to income ratio above 2 will have a harder time in the future.
My suggestion to you is don’t worry about what you can’t control. In addition, learn about the various repayment programs available today. Then choose one that is expected to save you the most money. If you have a debt to income ratio below 1.5 and an interest rate above 5%, try to see what kind of private refinancing offers you could get on your debt. You might be shocked and receive a rate lower than 3% on a five year variable loan. Focus on the actionable steps you can use to save money today.
I Can Help Deal with Trump Student Loan Uncertainty
Student Loan Planner, LLC provides low cost, flat fee student loan advice. I only charge a one time fee. For each consult, I perform a holistic loan analysis to see what your best available repayment options are.