Trump repealing PSLF is likely if he wins reelection in 2020. That said, his repeal proposals have always been limited to borrowers who haven’t taken out student loans yet. The earliest this plan could take effect would be in the fall of 2021.
Trump’s budget would also eliminate REPAYE, PAYE, and IBR and replace them with a 30 year version of IBR. This new plan will probably not have an interest subsidy like with REPAYE.
I wrote this article back in January 2017 in anticipation that the Trump administration would attempt to eliminate the program. The Republican Congress will probably try to repeal the PSLF program but will grandfather current borrowers who have PSLF in their promissory note.
Rising first year grad students in fall 2020 and spring 2021 are most likely safe. New borrowers beyond that date should be prepared to not receive the benefit. Here’s my latest thoughts on Trump’s efforts to repeal PSLF
Everyone Wants to Know: Is Trump Repealing PSLF?
I’ve gotten a ton of clients asking me about the Trump administration’s plans in regards to the Public Service Loan Forgiveness program (PSLF).
For those who don’t know, PSLF allows you to work for a not for profit employer for 10 years and receive tax free loan forgiveness. For many borrowers burdened by huge amounts of student debt, PSLF is their only hope. Here’s how you should prepare your finances if you’re worried about Trump repealing PSLF.
Act Like Trump Repealing PSLF is Not Going to Happen
I had an interesting conversation with a client a couple days ago 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.
If she stays on PSLF and files her certification paperwork, she’s on track to save about $200,000. 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. That change just won’t affect anyone currently pursuing the program.
Another 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.
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 President Obama’s budget around the same time.
President Obama tried to limit PSLF to $57,500. That effort failed due to resistance in his own Democratic party.
Fast forward to January 2017, and Republicans had all the levers of power. They failed to repeal PSLF.
What are the chances a divided Congress and White House gets anything done with the PSLF program? Slim to none. That’s great news for borrowers with Direct loans because you just need to run out the clock in that case.
Remember that PSLF repeal would have to happen from an act of Congress and not just because Trump wills it. Not only is Washington divided, but two different parties control the House and Senate in 2020.
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 Trump Repealing PSLF is Happening Tomorrow
Prepare your finances just in case PSLF repeal becomes reality. It’s very unlikely to affect you if you already have debt.
That said, many election models had Trump’s chances at below 5%. You never want to say never.
Borrowers going for 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. They would need to use IDR 20 year loan 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
Trump 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 6 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 Trump destroys PSLF, then you can retool your loan strategy accordingly.
Are you worried about Trump repealing PSLF? Share your thoughts in the comments.
P.S. If you are facing a six figure student loan burden, check out how we create “Trump PSLF & PSLF backup plans” for your student loans.