- 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?
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
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.
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
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.
