Note: please see our post on the Trump student loan interest waiver here if you’re looking for information related to student loan relief during the COVID-19 pandemic
The race for the 2020 election is heating up. And Vice President Biden has unveiled a bold student loan forgiveness plan. But President Donald Trump has made a few student loan forgiveness changes himself. And he has several more proposals on the table.
Trump’s student loan forgiveness changes began with the passing of the Tax Cuts and Jobs Act in December 2017. But Trump’s 2020 budget and 2021 budget proposes even bigger changes — including the consolidation of income-driven repayment plans and the elimination of Public Service Loan Forgiveness.
Along with Trump’s plan to increase IDR payments to 12.5% of income instead of 10% and require borrowers with graduate degrees to pay for 30 years instead of 20, borrowers overall would pay billions of dollars more under Trump’s student loan plan.
This guide covers all the student loan forgiveness changes that Trump has already made, potential changes in 2020 and how they compare to other leading proposals.
Collectively, we find that student loan changes that Trump favors could cost borrowers at least a quarter of a trillion dollars over 10 years.
Changes to student loan forgiveness under Trump
The Trump administration passed its Tax Cuts and Jobs Act in 2017, which included two student loan-related changes.
Total Death and Disability Discharge no longer taxable
When borrowers with federal student loans are permanently disabled, they can receive student loan forgiveness through the Total and Permanent Disability Discharge (TPD) program.
Previously, forgiveness through this program was treated as taxable income. But the Tax Cuts and Jobs Act changed that.
This is good news for disabled borrowers. Imagine that you received $50,000 of forgiveness through TPD. Even if you were only in the 12% tax bracket, that would generate at least a $6,000 tax bill.
Coughing up a chunk of change that large would be tough at any time but especially when you aren’t able to work. This simply wasn’t fair, and it’s great that the rule has been changed.
It’s important to note, though, that the law isn’t retroactive. Only loans forgiven on or after Jan. 1, 2018 qualify.
Tuition and Fees Deduction no longer available
The Tax Cuts and Jobs Act eliminated the Tuition and Fees Deduction. Before it expired, you could use this deduction for certain school expenses. Enrollment fees, tuition, course books and lab fees were examples of qualifying expenses.
It’s a bit of a bummer that this deduction is no longer available. But several other popular student loan tax programs remain unchanged. The American opportunity tax credit, Lifetime Learning Credit and student loan interest tax deduction (for now) are still available under the current tax code.
Trump’s 2020 student loan proposals
Trump has much bigger student loan changes in mind. If his 2020 budget is approved, it could have drastic effects on the student loan landscape.
Here are a few of the notable student loan proposals included in the White House 2020 budget.
Create one consolidated income-driven repayment plan
Currently, there are four income-driven repayment (IDR) plans. Depending on the plan, you can receive student loan forgiveness after 20 to 25 years of payments.
Trump’s plan is to consolidate all the plans into one. The rationale is that this would minimize confusion and make IDR easier to manage for the Department of Education.
Increase IDR monthly payments
With current IDR plans, your payment will typically be 10% of your discretionary income.
But if Trump’s proposals pass, monthly payments would increase to 12.5% of a borrower’s discretionary income.
The CBO estimates that the current student loan subsidy for IDR plans is 43% using a fair-value approach. It also estimates the expected federal student loan issuance over the next 10 years will be about $1.05 trillion.
I compared the present value of different cash flow estimates with a higher required payment.
My estimate is that the subsidy on IDR plans under a plan requiring 12.5% of income would be 28% using a fair-market value approach. That’s in contrast to the higher subsidy rate of 43%, according to the CBO.
53% of borrowers with Direct Loans are on an income driven plan as of March 2020, according to the Department of Education.
That means Trump’s student loan plan would increase costs to borrowers by:
(Subsidy difference of 0.43 – 0.28) * ($1.05 trillion expected student loan issuance over 10 years) * (53% share of borrowers on IDR plans)
= $83 billion over 10 years.
Make IDR student loan forgiveness sooner for undergraduate loans
Along with the consolidation of the four IDR plans into one, student loan forgiveness would happen sooner for undergraduate borrowers.
Undergrads would be eligible to receive student loan forgiveness after 15 years. This would speed up forgiveness by five years from current IDR plans.
Make IDR student loan forgiveness later for graduate loans
While undergrad loan forgiveness would speed up under Trump’s plan, grad loan forgiveness would take longer.
Under Trump’s plan, graduate borrowers would need to make 30 years of payments before qualifying for forgiveness. That’s five years longer than current IDR plans for graduate loans.
There are more undergraduate borrowers compared with graduate borrowers. It’s unclear exactly what the effect would be on overall cost of changing the length of IDR forgiveness, but it would likely cost borrowers money overall.
Eliminate Public Service Loan Forgiveness
In what is probably Trump’s most controversial proposal, he wants to do away with the Public Service Loan Forgiveness (PSLF) program. The Trump administration argues that PSLF is a mess and gives unfair preferential treatment to public service workers. It says offering 15-year forgiveness to all federal student loan borrowers is a better plan.
In cutting this type of student loan forgiveness, a ton of overhead would potentially be eliminated, as the Department of Education would no longer have to deal with the headache of verifying employment data from PSLF applicants for 10 years.
This repeal would not affect borrowers currently eligible for Public Service Loan Forgiveness. The PSLF program is explicitly listed as an option in your promissory note if you are an existing borrower. President Trump’s plan would affect borrowers who have not yet taken out student loans.
You cannot qualify for PSLF unless you work 10 years at a qualifying not for profit or government employer while making income driven payments.
Approximately 25% of the work force works at a qualifying employer and 53% of borrowers pay their loans on an income driven plan.
By repealing PSLF, future borrowers could lose as much as (25% of workers eligible) * (53% share on an IDR plan ) * ($1.05 trillion in student loan issuance in the next 10 years) =
$139 billion over 10 years.
What Trump’s opponents say
Opponents to the change (and there are many) say that PSLF is needed. They believe the program encourages qualified workers to choose public service professions. Trump is going to have a fight on his hands when it comes to eliminating PSLF. He’s tried before and failed.
Even if he’s able to get this proposal passed into law, it would only apply to future student loans. If you’ve already been accepted into the PSLF program and have been making qualifying payments, you should be able to finish the program.
Eliminate subsidized student loans
Currently, some federal student loans don’t accrue interest while borrowers are still in school. To qualify for these subsidized federal student loans, borrowers must demonstrate financial need.
If your family income is too high, you can take out an unsubsidized federal student loan. But Trump wants to do away with subsidized student loans altogether.
According to the nonpartisan Congressional Budget Office, Stafford Subsidized loans have a 10.7 percent subsidy rate. Out of $254 billion in issuance over 10 years, this would cost borrowers $27 billion over 10 years.
Again, this is sure to be an unpopular proposal. It also will have a hard time passing both houses of Congress.
How Trump’s student loan forgiveness plans compare to others
As mentioned earlier, Trump isn’t the only one proposing student loan reform. Here are a few more plans being tossed around in Washington.
What You Can Do For Your Country Act
While Trump is angling to eliminate PSLF, Sens. Tim Kaine, D-Va., and Kirsten Gillibrand, D-N.Y., as well as other Democratic senators, are looking to improve the program.
Here are a few key highlights from the What You Can Do For Your Country Act that was proposed in April 2019.
- Forgive 50% of student loan balance at five years: This would be a huge change, as currently it takes 10 years to earn PSLF forgiveness. With this plan, borrowers could have half of their balance forgiven at the five-year mark.
- Count “pay ahead” payments toward PSLF: This would keep you from being penalized for trying to do the right thing and paying more than you have to.
- Count all types of federal student loan: It’s unclear exactly what this would mean. But Democrats want Federal Family Education Loan (FFEL) Program Loans to qualify for PSLF.
- Eliminate the need for income certification: With this plan, every payment would qualify for PSLF. Therefore, there would be no need to annually certify your income.
- Allow self-certification of public service employment: If your employer refused to sign your certification form, you could certify your employment yourself.
- Make “30 hours a week” the clear definition of full-time employment: Currently, “full-time employment” is considered to be 30 hours or whatever your employer considers full-time. With this change, your employer’s definition would no longer matter.
How does Kaine and Gillibrand’s proposal compare to Trump’s?
On one hand, it recognizes the need to simplify the program. But it also demonstrates that the Democrats believe PSLF is worth preserving.
In many ways, it’s a fairly balanced and well-thought-out proposal. But it’s unlikely to pass unless a Democrat wins the White House in 2020.
Student Borrower Bankruptcy Relief Act of 2019
The Student Borrower Bankruptcy Relief Act of 2019 was introduced by Sen. Richard Durbin, D-Ill., on May 9, 2019.
If passed, this piece of legislation would make it possible for student loans to be discharged in bankruptcy.
While that’s technically possible today, borrowers must prove “undue hardship” to a judge. Opponents to this current rule say that it’s incredibly subjective. They also find it strange that student debt is treated differently than all other debt in bankruptcy.
Lawmakers and advocacy groups have been calling for student loan bankruptcy reform for quite some time. But so far, Trump’s team has remained relatively mum on the issue.
Elizabeth Warren’s student loan forgiveness plan
Sen. Elizabeth Warren, D-Mass., one of the Democratic presidential candidates, has been very vocal about the student loan problem in America. And she’s presented a bold plan to give borrowers relief.
With Elizabeth Warren’s plan, the government would forgive up to $50,000 of student debt per individual. The exact amount forgiven would depend on the borrower’s income.
Warren says her plan would erase all student debt for 75% of borrowers and would provide at least some relief for 95% of borrowers.
Borrowers with an income of under $100,000 would receive the full $50,000. After that, borrowers would receive less. Her plan caps out completely for borrowers who make $250,000 or more.
She also plans to pass a universal free college program, which would make all two-year and four-year public colleges tuition-free.
Bernie Sanders student loan forgiveness plan
If you thought Elizabeth Warren’s student loan forgiveness plan was extreme, wait until you hear what Sen. Bernie Sanders, D-Vt., has in mind.
In short, he wants to forgive all $1.6 trillion of United States student debt in one fell swoop. Yes, that includes private student loans.
To pay for his plan, Sanders would institute a Wall Street tax. All stock, bond and derivative trades would be charged a small tax under Sanders’ plan.
Like Warren, Sanders also wants to make college more affordable. His College for All proposal calls for all four-year public universities, tribal colleges, community colleges, trade schools and apprenticeship programs to be free for families earning less than $125,000 a year.
The bottom line
The total projected cost to borrowers if President Trump’s student loan plans became law would be at least $249 billion, as projected above.
In order for any legislation to become law, the proposal must pass both the House and the Senate. And in our polarized political environment, far-left or far-right bills are going to have a difficult time making it through.
Trump, the Democratic presidential candidates and other politicians all have their own ideas for how to fix the student loan mess. If one party is able to win the presidency, the House and the Senate in 2020, it may be able to push its bolder ideas through.
Otherwise, it’s going to take both sides working together (and making compromises) for progress to happen.
What do you think of President Trump’s new budget and efforts to repeal Public Service Loan Forgiveness? Let us know in the comments.