- May 18, 2017
- Posted by: Travis
- Category: Government, Income Driven Repayment, PSLF
The Washington Post reports that it has a yet to be released Dept of Education budget proposal showing radical changes to student loan policy. There are three major parts to the plan relevant to student loan borrowers. Trump wants to repeal PSLF, mostly eliminate Subsidized and Perkins student loans, and replace all income driven repayment programs with a single 30 year income driven plan for graduate degree holders. Please let me know if you have questions about this in the comments section at the end of the article.
What Does Trump’s Education Budget Mean for PSLF?
Nobody should be freaking out just yet. Keep in mind that President Obama sought to effectively repeal PSLF for graduate students in 2015 by capping the benefit at $57,500. That failed because Congress didn’t want that to happen.
Republican PSLF repeal proposals have grandfathered in current borrowers in the past. Very reasonable senators such as Lamar Alexander of TN, the chair of the Senate Education committee, would probably take that approach.
I’ve written what I think about Trump repealing PSLF before, and I stand by what I wrote. I think the probability of PSLF repeal is certainly higher now, but it’s still more likely than not that PSLF stays in place for those using it currently. Perhaps I’d place the odds at 75/25 that current borrowers will get to use PSLF.
Read More: What to do if you’re worried about Trump repealing PSLF
What About Trump’s Proposed Repeal of PAYE, REPAYE, and IBR?
This is a more surprising development to me and potentially the more concerning. Trump wants to create two different rules depending on if your loans are from undergrad or grad programs. For undergrads, he creates a very generous 12.5% of income program that allows for forgiveness in 15 years. That’s the program I model in my free student loan calculator.
However, he creates a shockingly worse program in his proposal for graduate school level professionals. He would replace all five income driven repayment options (REPAYE, PAYE, old IBR, ICR, and new IBR) with a single Trump student loan repayment plan.
The New “30 Year IBR Plan” Would Hurt Grad Degree Professionals
Trump’s income based repayment plan would require payments for 30 years until forgiveness for grad school loans. Very likely, it would not include any interest subsidies either. This income driven option could remove the existing repayment programs and force current borrowers into a less advantageous option. The only positive is that the payment would be 12.5% of discretionary income instead of 15% as with IBR. However, it’s still higher than the 10% currently required under REPAYE and PAYE.
Again, there will be a lot of lobbying and fighting over this budget proposal. Congress has to pass laws surrounding appropriations and this is Trump’s opening round. Not to mention, the President doesn’t have a lot of political capital right now.
That means that the real fight is yet to come. However, this does show the administration’s desire to massively reduce the government’s role in the student loan marketplace.
Trump’s Education Budget Would Make Private Refinancing a Lot More Attractive
Right now, I’m helping clients in 1 on 1 consults come up with a plan for their student debt. That often means helping them get interest subsidies with the REPAYE plan until the debt to income ratio looks good enough to refinance to a lower interest rate long term.
If REPAYE didn’t exist and we had only a 30 year version of IBR from the Trump education budget to choose from, staying on the federal loan system for high income borrowers becomes a lot less attractive.
I estimate a majority of physicians who graduated in the last five years are working towards loan forgiveness under PSLF. If Trump repealed PSLF, then this group would all need to look towards private refinancing instead.
Trump and his budget officials assume that this change in student loan rules would bring in a lot of profit for the government. However, I disagree strongly. Why stay on 30 year IBR paying 7% interest when you could refinance your student loans down to 5%?
The answer is that only those individuals with very high debt to income ratios would go for student loan forgiveness under this scenario. That means the marginal “should they refinance or not?” discussions would lean towards refinancing.
There’s a Lot We Have Yet to Learn, but I’d Contact Your Congressional Representatives
I’m very serious about you needing to get involved. If you’re depending on PAYE, REPAYE, or PSLF to make your student loans manageable, the Trump education budget puts your finances at risk.
Congress gets the final say in this matter, so contact your Congressperson and both Senators if these programs are important to you. Mention how high student debt is, and how it’s a top issue for you that will decide how you vote. That’s what I would do if I owed a lot of debt relative to my income.
My Takeaways for Student Loans from this Unexpected Trump Education Budget
It’s clear that Trump wants out of heavy government involvement in student loans. His approach is more aggressive than I expected, but Congress is still a formidable roadblock. There are a lot of high income high education borrowers such as yourself that depend on these government income driven repayment and forgiveness programs to feel comfortable buying a house, starting a family, and more.
Worrying over proposed student loan changes won’t help, and there’s a strong chance that Trump will not be able to accomplish his proposal. My advice to clients would be use the programs that exist and change course if it comes to that. If you abandoned PSLF in 2015 when President Obama proposed a low cap, you lost out on 2 years of credit towards probable tax free forgiveness.
No matter what Trump does with student loans, there are still going to be ways to save money. If you have to go for private sector loan forgiveness, save the max for retirement. If your debt to income ratio is below 2, then look into private refinancing and just getting rid of the debt. Working at a not for profit of government employer? Act like PSLF is going to be around and prepare just in case like it’s not by saving in a side investment account.
I Can Help
Regardless of what Trump’s trying to do with student loans, my job is to help you come up with a plan to pay them back.
Student Loan Planner makes money through flat fee student loan consultations, and I’ve consulted on tens of millions in student debt for hundreds of clients. I’d be honored to help you too.
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Can you please explain the last statement in the article recommending saving in a side investment account in case PSLF goes away? Would the purpose of this be to pay off the loan? Other reasons?
A side savings account is a hedge. So if you are uncertain about PSLF going away, you put a probability on that. Maybe it’s 50/50. Say your PSLF savings would be $200,000. That’s a big amount to just give up on, but you also want to make sure you’re able to refinance to a lower interest rate and pay it back fast is PSLF repeal is successful. That’s the purpose of a side account. You want to have a big chunk of money ready to go in case PSLF gets repealed and your only option is paydown. That said, you also don’t want to pay that money into your loans bc what if PSLF stays? That’s the current strategy I’m recommending to clients
What programs are most at risk? I’m using REPAYE to pay back my loans on PSLF, will I lose both?
I think the income driven repayments are definitely more at risk than PSLF. REPAYE and PAYE are executive orders, and could relatively easily be changed. Contrast that with PSLF, which is an actual act of Congress. That means you could see a scenario where Trump consolidates the income driven repayment plans but Congress blocks him from repealing PSLF, which means you would make payments on whatever the new Trump plan is for PSLF
What are the chances all this actually happens? Trump is in a lot of trouble right now and I feel like this kind of proposal isn’t going anywhere with all the investigations going on
It’s true that his legislative priorities are probably going to take a back seat for the next few months, but I view this as a major effort to try to restrict federal student loan involvement. I think we’re at least 6 months out from any changes actually taking place. I think it’s maybe 50/50 that we see income driven repayment programs get consolidated and 75/25 that PSLF borrowers get grandfathered in like I mentioned in the article
This is the main reason for people not to rely on big government for help. Remember it and the schools are the ones who created this mess. And there is certainly no reason for the government to want to bail everyone out. Last I heard student loans are one of just 3 government programs turning a profit, and it’s a sizable one at that. And for the so-called “higher-earning professionals” to get bailed out would create an uproar in the country over the perception of healthcare professionals as rich folks. If anything, expect the healthcare folks to remain t[on the hook indefinitely whoile the “poorer” folks and the ones with expensive fine art degrees to get bailed out first, if at all.
As with anything, government involvement in education has royally fu*ked up the system. If they can repeal Obamacare (at least it’s getting through the house) why can’t they do the same to pslf, ibr, and repaye? These are even easier to revise and amend.
PSLF would be the hardest to change because it’s an act of Congress and some argue the government obligated itself by adding PSLF to the loan promissory notes of borrowers under the Direct loan program. However, REPAYE and PAYE could easily be changed. After all, they’re executive orders subject to the whims of who is in office.
The loan program doesn’t make the kind of actual profit that budget statements claim that it does. They’re using cash based and not accrual based accounting, and their assumptions are wildly optimistic. Furthermore, the Dept of Ed doesn’t account for the fact that many of these loans will be heavily subsidized when people pay a fraction of what they owe in taxes on the forgiven balance, if anything at all.
If possible, I do prefer getting clients set up on a path to full repayment. However if they’re going for PSLF, then they need to have a hedge strategy set up.
You should do a financial analysis on say a dentist working in pslf vs one in private industry and see who comes out on top assuming the one in private attempts to pay it off in 10 pslf. Pslf shouldn’t be taken lightly because you are often sent to areas in the middle of nowhere and the salary quite abysmal. Either way, I think the current crop of new dentists are f**ked for a long time. Makes me glad I finally paid off all of my loans this week and I don’t need to deal with the subject anymore except in discussion.
The private sector dentist is going to come out on top in most cases, but only if they’re very entrepreneurial, willing to work hard, hire consultants and marketing folks, practice in a good area, etc.
Awesome about being debt free. That’s my goal is to help people get there if they aren’t already.
One issue is that physicians can practice for 3-5 years as an attending post graduation and get this huge financial windfall. So moving towards equality in treatment among healthcare providers will probably happen sooner rather than later.
I agree wholeheartedly with everything you said in this comment, with one little tiny caveat as an attorney.
While I am fairly confident in the contractual argument that the government obligated itself to loan forgiveness through the promissory note, I would be obligated to do much more research before recommending any course of action to a client based on that assumption. Primarily, I’d need to try to confirm whether the entity that made that promise is also the entity in control of such programs and funding. I’ll copy and paste from a comment I wrote on Biglaw Investor some time ago about the same topic:
That’s sort of operating under the false assumption that the federal government is one massive entity that issues student loans, writes the tax code, forgives debts, and places limits on debt forgiveness. That’s just not true. So, I’m not sure whether the entity that holds the promissory note seemingly guaranteeing that the remaining balance will be forgiven is an entity that can throw up it’s hands at the end and say “Hey, it’s the IRS’s fault that it’s a taxable event now! Sorry!” or “Hey, it’s Congress’s fault that you’re entire balance can’t be forgiven anymore. Sorry!”
True that’s why I operate on an expected value framework. I set up a hedge w taxable savings to protect against pslf repeal while optimizing the steps that will maximize the forgiveness benefit if it happens. It’s the only way to deal with uncertainty as a former bond trader you gotta hedge
Hello,
Heres the my situation,
I went to ITT Technical Institute and filed for defense to repayment back in October 2016 and am waiting for a decision. My total debt is around 60k.
I am need to purchase ma different a home as my family size is now 4 and in our area we cant get anything under 180k for a home. We make together 70k a year and are making 62k off the sale of our home.
Would you put 20% down on the home and rest in the savings (roughly 25k) while we wait to see if we get forgiven and see what Nancy Devos decides and congress figures out. Right now we are on a Repayee.
Or do we pay a higher mortgage put 5% down and put the rest into the student loans that could possibly be forgiven (this would put us in a very tight spot with money however)
Thoughts?
Thank you
ITT Tech is one of the schools that defrauded their students and they’re supposed to forgive the debt that you incurred while you were there. So I certainly wouldn’t put anything into the loans until you get word on what they’re going to do about it. I don’t specialize in that part of student loans so I’d contact someone like The Boston Student Loan Lawyer and ask about why you haven’t received forgiveness yet since it’s ITT Tech debt.