What 2020 Student Loan Reform Proposals Mean for the Future

Whenever there’s a primary election, candidates fight for attention. The student loan reform platforms I’ve seen for 2020 tell you a lot about the range of possible proposals that might come out of the Democratic Party now and in the future.

The Republican Party hasn’t been able to enact much of its agenda on student loans at all.

There are very good reasons for this that we’ll look at. I’ll also predict what the future could hold for student loan reform based on what I’m seeing candidates talk about.

Why student loan reform proposals have failed so far

Why haven’t we seen action on student loan debt yet? Republicans tried passing the Prosper Act, and Democrats tried to pass the Aim Higher Act. Neither succeeded.

Both would have simplified income-driven options from many to just one.

That’s where the similarities end, though. Republicans want borrowers to pay 15% of their income for more than two decades.

Democrats want borrowers to pay 10% of their income for 20 years, while also reducing the payment even more for lower-income families by giving them a higher deduction.

When Republicans controlled Washington from 2017 to 2019, they had bigger fish to fry (repeal of the Affordable Care Act, tax reform, etc.).

Since Democrats took the House, they have also had bigger priorities.

This simple partisan disagreement is one big reason why we haven’t seen progress on student loan reform yet.

Why student loan reform could succeed after the 2020 election

I like to joke about how instead of making custom student loan payment plans, I’ll be selling flowers on the street if Sen. Bernie Sanders, D-Vt., wins and forgives all student loans.

In all seriousness, the Democrats aren't engaging with President Donald Trump on student loan reform because they believe they can beat him in 2020.

Why would you compromise and make a major change to a long-term federal program right now if you were House Speaker Nancy Pelosi?

You likely believe you’ll keep the House, take the White House, and possibly deal with a more moderate Republican Senate — if not win that, too.

Then you’ll have the power to push through whatever you want on student loan reform, which is what I think the Democrats are doing.

If Trump wins reelection, then I doubt the Democrats will lose the House or gain the Senate. This means the most likely outcome in that case is that nothing would change.

So, if I had to summarize my prediction on the chance for student loan reform:

• Democrats win in 2020: major changes should be expected
• Republicans win or win a split decision in 2020: No or limited student loan reform expected

Student loan predictions based on what candidates are saying

The Democrats have a huge range of opinions concerning what to do about the student loan crisis.

Here’s what some of what the major candidates want, in no particular order:

• Refinance federal student loans to a 2% to 4% interest rate
• Expand the Public Service Loan Forgiveness (PSLF) program and make many borrowers qualify retroactively
• Simplify income-based payment options
• Make high-income borrowers pay more under most income-driven programs
• Give low-income families a much bigger deduction before they have to pay anything on their student loans
• Make public colleges and universities free at the undergraduate level

That’s what I would call the “moderate proposals.”

Radical options for student loan reform

More radical options put forward by Sanders and Sen. Elizabeth Warren, D-Mass., call for mass forgiveness of student debt. This would be financed by a wealth tax on the richest Americans.

Warren’s plan is intense but cheap enough to potentially pass.

Sanders’ proposal would forgive all $1.6 trillion by imposing such a large wealth tax that Jeff Bezos, CEO of Amazon, would lose a projected $9 billion per year.

Warren would forgive only the smaller balances while Sanders would wipe everything.

Vice President Biden's student loan plan seems like it's not a big deal, but it would be an earth shaking change. He wants borrowers to only pay 5% of their discretionary income in student loan payments. The forgiveness term would last for 20 years and forgiveness would not be taxable.

To be frank, if he were to pass something like that no one would pay hardly anything on large student loan balances. Why would you?

Our view is that Warren’s plan is fairly well-thought-out in terms of the potential moral hazard it would create for schools to be careless about costs, though there are still problems with it.

The Sanders and Biden plans, on the other hand, are not well-thought-out at all — though it’s inspiring for those desperate for a huge change.

Universities that currently face no limits on student loan borrowing would be happy to increase their prices even further if even six-figure balances were wiped away. If borrowers could pay almost nothing under Biden's plan, they'd be more than happy to oblige.

To forgive all student loans, you’d need protections in place to make sure universities don’t create the problem all over again.

Clear framework for student loan reform

Here are my wild predictions about what we’ll see after the election in 2020:

• A push for restrictions on high-income professionals using PSLF (for future borrowers only)
• Elimination of the tax bomb for student loan forgiveness in the private sector
• A new kind of federal student loan with a single income-driven repayment option
• Poorer families will pay less; richer families will pay more (on new loans only)
• Current repayment options will remain
• If Democrats win, federal student loan interest rates might decrease; if Republicans win, they might stay the same
• Both parties at some point will realize that uncapped borrowing is a terrible idea

If you can predict the future of the 2020 election, I could tell you a lot more about the future of student loans.

Until we have that result, borrowers should take comfort that most every student loan reform proposal in 2020 and before grandfathers current borrowers in under current forgiveness and payment options.

Should you be forced to move to something new, it will likely be more generous, not less.

If you’re stressed out about what to do under present rules, you can always hire us to make a custom plan for you now.