- May 25, 2017
- Posted by: Travis
- Category: Government, Income Driven Repayment, PSLF
What is the Trump student loan repayment plan? Let me start with some good news. Based on the original documents and proposals I’ve reviewed, most people who already have loans or who are currently in school will probably not be affected. However, for folks going to school in the fall of 2018 and beyond, a massive stratification in undergrad and grad school loans is about to occur.
Trump Student Loan Repayment Stinks for Grad School Students
Trump student loan repayment splits loans into two groups: grad and undergrad. For both, you pay 12.5% of your discretionary income. However, for undergrad loans, you get forgiveness after 15 years of payments. For grad school loans, you get forgiveness after 30 years. This FY 2018 budget essentially creates a 30 year mortgage on people’s brains.
Compare the 30 year, 12.5% of your income proposal to the current plans that exist. Right now, a borrower with grad school debt could sign up for PAYE and pay 10% of their income for 20 years until forgiveness. If they’re not eligible for PAYE, they could choose REPAYE and pay 10% for 25 years or IBR at 15% for 25 years.
It’s usually a battle between PAYE and REPAYE over which one to choose. PAYE has the shorter forgiveness period, and REPAYE has interest subsidies that PAYE does not. I expect the Trump student loan repayment plan will not have any special interest subsidy features. At a maximum, the plan will probably allow negatively amortizing loans to accrue interest rather than have it compound. That said, I think REPAYE’s interest subsidies are going out the window.
Read more: I’ve been predicting that Trump repealing PSLF would happen for a while now.
How Do I Figure Out How Much the Trump Student Loan Plan is Going to Cost Me?
As with all income driven plans, the new Trump plan would be dependent on your individual circumstances. I love modeling though, so I’m going to give you some examples so you can see for yourself. This is the free student loan calculator I give away only to Student Loan Planner subscribers.
Let’s say we’ve got a 21 year old rising college senior named John. He’s going to dental school starting in August 2018. He got into his in state program. Even so, he expects his four year educational cost to come in at $350,000 at 7% interest.
John’s going to work as an associate dentist for the duration of his career. So we’ll say he stays single and starts at $120,000. That rises to $150,000 over 5 years and goes up by inflation after that. Here’s how the cost of the different repayment programs stack up compared to the Trump student loan repayment plan.
Trump Student Loan Changes Will Be Way More Expensive than PAYE / REPAYE
So if we look at the above analysis, we see the Trump plan comes in at 63% more than the PAYE plan. It’s 33% more than REPAYE, and 11% more than IBR. So in every scenario, the Trump plan makes borrowers for grad school lose a lot of money.
What about if we looked at another example to explore further? Let’s consider Suzanne the aspiring veterinary student. She’s going to borrow $300,000 for her education at 7% and expects to earn $65,000 a year initially. She expects that will increase to $80,000 over the first five years, with inflation level raises after that.
We’ll assume she’s single with no kids long term to make the analysis simple again. Here’s the results.
So the Trump plan weighs in at 50% more expensive than PAYE, 12% more expensive than IBR, and 37% more expensive than REPAYE.
What About if I’m Not Going for Loan Forgiveness Because my Income is High?
Great question. Then private refinancing is going to show up as the cheapest option, unless of course you’re going for Public Service Loan Forgiveness. By choosing something like the Trump student loan repayment plan, you just drag out the higher interest for longer.
I help a lot of clients make the change away from the IBR plan, but the Trump plan would clearly be even worse than that. After all, it’s 30 years until forgiveness instead of 25 years. That 30 year forgiveness is only for grad students, but if student loans are a big source of stress for you, that’s probably because you went to grad school.
If You Aren’t Taking Loans Out After July 1, 2018, You Probably Don’t Need to Worry too Much
There’s actually some encouraging language in Trump’s budget he posted on the White House website. Check out this verbiage:
All student loan proposals apply to loans originated on or after July 1, 2018, except those provided to borrowers to finish their current course of study
That means I expect borrowers currently using REPAYE, PAYE, IBR, and PSLF to be grandfathered in after this update. That’s great news for folks out there with huge student loan balances. That said, I think politicians could always try to impose a cap on the forgiveness benefit with PSLF. I guess with about 85% probability that current borrowers will get to use these programs.
The Next Thing to Find Out: What does Trump’s Budget Mean for Students Currently in School?
I’m really curious what they mean by “borrowers to finish their course of study.” The way I would interpret that is anyone who signs up for a program before July 1, 2018. If so, any new students after that date would not have access to things like PSLF, IBR, PAYE, and REPAYE. Anyone before that date, ie people going to grad school this fall, could keep access to those programs.
If so, that’s going to create some massive distortions in the market for graduate education. Imagine if you went to med school and had PSLF for $400,000 in student loans. Now imagine if the class after you didn’t have access to PSLF. Would schools be able to charge the same price to both classes? My guess is no.
A lot of law schools out there depending on PSLF could really be in trouble. That’s where I expect drop off in demand would show up first in enrollment numbers. My guess is people will continue to go to med school, dental school, vet school, etc. without thinking about the price tag too much at least for now.
The Takeaway from the Trump Student Loan Repayment Plan
If you’re going to dental, medical, pharmacy, or PA school, you’re probably fine. You’ll just have to refinance sooner and hope interest rates stay low. For veterinary and chiropractic school, I’d seriously think long and hard about the career choice for those entering school in 2018 and beyond.
The Trump student loan repayment plan is going to drastically increase long term prices for graduate education, in some cases by 60% or more. His proposal significantly increases the long term cost of many graduate school programs.
If you can get into your in state school and live frugally, DO IT. Otherwise, think long and hard before signing on the dotted line.
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