President Trump proposed radical changes to student loans in his FY 2018 education budget. Then nothing happened. Now in 2019, President Trump proposed basically the exact same thing for the fiscal year 2020 education budget. There are three major parts to the plan relevant to student loan borrowers, and his 2020 demands are almost identical to his proposals from a couple years ago.
- Trump wants to repeal PSLF for new borrowers who have not yet enrolled in school
- He would eliminate Subsidized and Perkins student loans
- The Trump administration would like to replace all income driven repayment programs with a single 30 year income driven plan. Forgiveness would happen after 30 years for debt from grad school and 15 years for undergrad debt.
Borrowers who don’t follow this blog predictably freaked out when the media announced this. Realistically, you don’t have much to worry about from the Trump budget proposal. President Obama suggested capping PSLF at only $57,500 for the 2015 budget. His own party resisted and the measure died.
Now we have split control of Congress, and President Trump just decided to repeat his administration’s desires for higher education policy without much change. Senate Republicans are offering far more generous repayment terms.
We know that House Democrats prefer the Aim Higher Act, which would drastically expand and protect PSLF. House Republicans preferred the now defunct Prosper Act, which would have repealed PSLF for new borrowers. The Democratic proposal is the one that’s more relevant as Congress debates reauthorizing the Higher Education Act (HEA).
The Senate proposal for student loan reform runs through the Republican party, and specifically Senator Lamar Alexander, who chairs the HELP committee (Health, Education, Labor, and Pensions). Sen. Alexander will retire in 2020, raising the probability a HEA bill actually happens.
That said, we have a long history now of Congress and the President being far apart on student loan proposals. With such deep disagreement, the Trump education budget has virtually no chance of passing, but it informs how to handle loans now.
What Does Trump’s Education Budget Mean for PSLF?
Nobody should be freaking out. As I mentioned, 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 getting lower every year as more and more borrowers depend on it. Perhaps I’d place the odds at 90% that current borrowers will get to use PSLF.
What About Trump’s Proposed Repeal of PAYE, REPAYE, and IBR?
Republicans have generally favored higher payments than Democrats. Republicans want a higher payment than 10% of income. Democrats like the 10% number, but they want it to be higher for high income borrowers. Essentially they want a slightly progressive income driven repayment regime for student loans based on the Aim Higher Act.
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 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. Keep in mind, the proposal is not fleshed out at all. If Trump’s proposal eliminated the tax bomb, it could very well be better for many borrowers.
The New “30 Year IBR Plan” Would Hurt Some 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. However, I view it as far more likely that if a payment plan was worse for the majority, you’d be allowed to remain in PAYE and REPAYE.
The only scenario I see that could result in borrowers being forced into a new payment plan would be if it was better for the majority of borrowers, even though it might be worse for others. For example, if Congress passed a plan that required you to pay 10% of your income for 20 years, I could see them compelling borrowers to use it instead of REPAYE. Borrowers who benefit from interest subsidies might not anymore, and more people could be driven to refinancing.
This is all hypothetical of course. Grandfathering is highly likely with student loan reform because there’s just simply too many moving pieces at this point to easily change things.
The only positive with the Trump plan 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, with the current Congress this budget proposal is dead on arrival. Congress has to pass laws surrounding appropriations and this is Trump’s repetition of his desires.
The real fight will be over the Higher Education Act re-authorization. This does show the administration’s desire to massively reduce the government’s role in the student loan marketplace, but it’s been out there for a long time.
Trump’s Education Budget Would Make Private Refinancing a Lot More Attractive
Student Loan Planner helps 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
If you’re worried, get involved. For current borrowers, this budget proposal means nothing to you. If you have yet to go to grad school and would be 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 the 2020 Trump Education Budget
It’s clear that Trump wants out of heavy government involvement in student loans.
His approach is aggressive, 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 Trump will not be able to accomplish his proposal because of House Democrats. 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 4 years of credit towards highly likely 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 1.5, 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 like it’s not by saving in a side investment account.
We Can Help Navigate Student Loan Uncertainty in Washington
Regardless of what Trump’s trying to do with student loans, our 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 we’ve consulted on hundreds of millions in student debt for thousands of clients. We’d be honored to help you too.
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