Former President Donald Trump didn't win reelection in 2020, but there might still be some lingering fears surrounding efforts to repeal the Public Service Loan Forgiveness program (PSLF) in the future.
His repeal proposals were always limited to borrowers who haven't taken out student loans yet. His budget also included plans to eliminate REPAYE, PAYE, and IBR and replace them with a 30-year version of IBR.
Although he's no longer in office, a future Republican Congress could eventually try to repeal the PSLF program. But they'd likely grandfather current borrowers who have PSLF in their promissory note.
Here are my latest thoughts on efforts to repeal PSLF.
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What happened with Trump PSLF repeal attempts?
Clients flooded my inbox with questions asking about the Trump administration's plans in regards to the PSLF program.
For those who don't know, PSLF allows federal student loan borrowers to work for a nonprofit employer for 10 years and receive loan forgiveness that's not considered taxable income. For many borrowers burdened by huge amounts of student debt, student loan forgiveness eligibility is their only hope.
Trump's administration didn't end up repealing PSLF. But that doesn't mean there won't be future attempts by like-minded politicians.
Here's how you should prepare your finances if you're worried about PSLF being repealed.
Act like repealing PSLF isn't going to happen
I had an interesting conversation with a client before the presidential election about their $200,000+ student debt balance.
She had the ability to refinance and was incredibly worried about Trump repealing PSLF. Hence, her thought was why not go ahead and lock in a lower interest rate and pay everything off.
Otherwise, she would have to take her chances with whatever the new administration will do over the next 10 years of student loan payments.
If she stays on PSLF and files her certification paperwork, she's on track to save about $200,000 through debt cancellation. If she refinances and avoids waiting around 10 years to find out PSLF doesn't exist anymore, she could save about $50,000.
Let's think about this scenario like I would as a former bond trader. One outcome gives you savings of $200,000. The other outcome gives you savings of $50,000. The two options are mutually exclusive, meaning PSLF can't exist and not exist at the same time.
Therefore, if I wanted to decide what to do, I would multiple each of the numbers by the probability of each event and sum them.
What is the PSLF repeal probability?
PSLF is almost certainly going to be repealed or modified in some way at some point. That change just won't affect graduates or anyone currently pursuing the program.
One proof point is the way the US reforms social safety net programs like Social Security. The discussion centers on altering the rate of growth of future benefits. No politician wants to commit political suicide by reducing current benefits for beneficiaries today.
Let's look at some PSLF-related proposals in recent years.
The 2015 Republican PSLF repeal plan grandfathered in anyone who currently holds federal student debt. It also allowed students enrolled in degree programs at the time of the repeal to continue borrowing PSLF eligible loans until they graduated.
The Democrats also effectively proposed their own repeal plan in former President Obama's budget around the same time. He tried to limit PSLF to $57,500. That effort failed due to resistance in his own Democratic party.
Then in January 2017, Republicans had all the levers of power. Yet, they failed to repeal PSLF.
And most recently, the Biden administration is pushing to expand student loan forgiveness programs. Other significant details of Biden's federal higher education policy proposals include:
- Allowing bankruptcy discharge of student loans
- Reducing income-driven monthly payments that would be based on 5% of a borrower's discretionary income
- Increasing federal student aid through Pell Grants and supporting funding for Historically Black Colleges and Universities (HBCUs) and other other minority serving institutions
- Making four-year public colleges and community colleges tuition-free
- Excluding loan forgiveness from taxable income
- Canceling $10,000 of student debt for borrowers through legislative action
Keep in mind that these items are just proposals at the moment. But for now, borrowers can take comfort in knowing there will likely be PSLF improvements under Biden's plan, rather than destroying it under Trump PSLF plans.
Remember that PSLF changes would have to happen from an act of Congress with some measure of bipartisan support, not just because a president wills it.
Calculate the expected value of staying on PSLF
Going back to the earlier example, say you have $200,000 of savings under PSLF. Alternatively, assume you would incur losses of $50,000 if you remain on the federal loan system and accrue unnecessary interest.
After all, you can refinance your student loans and save money otherwise. With my probabilities, the expected value of staying on PSLF is $200,000*0.85+(-$50,000)*0.15=$162,500. Even if the probability is 50/50, staying on PSLF has a positive expected value.
Therefore, if you're looking at PSLF logically as an investment professional would, you need to be staying on the program if your savings are significant.
Prepare like repealing PSLF is happening tomorrow
Prepare your finances just in case PSLF repeal becomes reality at some point down the road. It's very unlikely to affect you if you already have debt.
Borrowers in pursuit of PSLF fall into two camps. The first group could pay their student debt off if they wanted to. They're pursuing PSLF because it's a better financial decision, not because it's their only option.
The second group can never repay their student debt due to economic hardship or huge grad or undergraduate loans. They would need to use income-driven repayment (IDR) 20-year debt forgiveness in the absence of PSLF.
Borrowers in the first group will have debt-to-income ratios below 2. They will refinance their loans and pay back their debt if PSLF went away.
Borrowers in the second group will need to focus on saving and investing more in retirement and mutual fund accounts if PSLF disappears.
What we've found after creating thousands of customized student loan plans for borrowers like you is that your savings rate matters far more than what happens with your student loans.
Set yourself up for success regardless of what happens with PSLF
Repealing PSLF would be bad news for a large number of borrowers. That said, it doesn't have to be a disaster. Plan for PSLF with your loan repayment strategy. Fill out the PSLF certification form. Maybe consider submitting it every six months instead of every year.
If you stop building progress towards tax-free loan forgiveness, you're giving up the potential future savings that could very well happen. We're all probably going to be dealing with higher tax rates in the future anyway, so you might as well get all the benefits you're eligible for.
Hedge your risk against PSLF repeal. Save aggressively outside of your retirement plan. If PSLF changes, then you can retool your loan strategy accordingly.
Are you worried about PSLF being repealed by the federal government? Share your thoughts in the comments.
P.S. If you are facing a six-figure student loan burden, check out how we create “PSLF & PSLF backup repayment plans” for your student loans.
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