The 43 million Americans with student loans — and the millions more who will take out their first college loans this fall — should pay close attention to President Donald Trump’s proposed 2018 budget. It requests dramatic changes to the help offered to borrowers, calling for an end to many benefits for lower-income students, and making life harder for those repaying graduate school loans. There’s a glimmer of hope, though, for those repaying undergraduate loans.
The budget, which was made public Tuesday, and is available on the White House website, is not set in stone — in fact, it’s more like a wish list the White House sends to Congress every year. Still, it will be used to frame discussion of student loan borrowing and repayment, so it demands attention.
Let’s break down what it could mean for you.
Lower-Income Borrowers Would Take a Hit…
Trump’s budget calls for elimination of the Stafford Loan program, which provides discounted loans to students with financial need. Stafford borrowers pay roughly half the interest rate of standard federal loan borrowers. These borrowers would also have to pay interest on their loans while in school, ending a long-time benefit. Students with standard federal loans don’t make payments while in school, but interest on their loans accrues and is capitalized, or added to their balance.
As Would Service-Based Loan Forgiveness…
The budget also calls for the end of the Public Service Loan Forgiveness (PSLF) program, which allows workers in some professions to see their loan balances erased after they make income-based repayments on their loans for as few as 10 years. The program began under the Bush administration, but under President Obama, the earn-out time was reduced to 10 years.
The program is already the subject of controversy, as the first crop of students eligible for 10-year forgiveness — about half a million graduates — will have that benefit kick in this fall. The Department of Education, under the leadership of Education Secretary Betsy DeVos, already has said it might not honor the forgiveness now. The Department of Education did not immediately respond to a request for comment about the program, or Trump’s budget.
Income-Based Repayment Plans Would be Reduced, But…
The biggest government savings in the budget when it comes to student loans, though, comes from reducing the number of income-based repayment plans made available to struggling graduates, according to a New York Times analysis. Currently, there are a series of complex offerings (explained in detail on the Department of Education website).
Plans with names like income-contingent repayment, income-based repayment, and “pay as you earn” are all designed to keep payments between 10% and 20% of the borrower’s income. Some offer payments as low as $5 per month, depending on income.
…Forgiveness Could Come Sooner
However, the Trump plan offers those using income-based repayment plans something Trump promised on the campaign trail. Monthly payments for undergraduate loan holders would increase slightly to 12.5% of income (from 10%), but would promise forgiveness on a shortened schedule — after 15 years of on-time payments. Currently, many plans require 20 years of payments.
Grad Students Would Be Hit Hard
On the other hand, those with graduate loans would face a tougher road. Graduate students would also have to pay more — 12.5% of their incomes — and would have to pay for 30 years instead of 25 years.
In other words, under Trump’s plan, a student who earned a graduate degree at age 25 would have to make on-time income-based repayments until age 55 to earn loan forgiveness, while someone with an undergraduate degree who graduated at 22 could earn forgiveness by age 37.
Those who plan to stop school after college might cheer the proposal, but an analysis of the student loan problem published by Credit.com shows that the majority of borrowers with oppressively large loans accumulated their balances in graduate school. While the average college loan balance for a 2016 graduate is about $37,000, one quarter of all grad degree earners had borrowed more than $100,000, according to a paper published by the New America Education Policy Program in 2015.
The New America paper also found that 40% of America’s outstanding $1 trillion-plus student loan balance is owed by those who earned a graduate degree. Trump’s budget essentially uses savings from cutting help to graduate school borrowers to offer help to undergraduate-only borrowers.
Whatever your student loan situation, keep in mind that missed or late payments can end up impacting your credit scores, which can hinder your borrowing ability in the future. You can see how your loan repayments are affecting your credit by checking your two free credit scores right here on Credit.com.
Image: Geber86
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