How President Donald Trump may affect your student loans
Since Trump was elected president of the United States, a lot of Americans have been holding their breath wondering how his decisions will affect their bank accounts. He’s promised lower taxes, more jobs and fewer regulations, which if they hold true, will be hugely beneficial for many. One area people are hoping he’ll help is with student loans. Here is what we know about his plans so far:
Modification to Income-Based Repayment
Among Trump’s proposed alterations, his revision to the Income-based repayment programs and the loan forgiveness schedule are the only two things that could affect existing borrowers as well as new borrowers. He has mentioned that he would change the income percentage that borrowers are paying on their loans from 10%-15% of their monthly discretionary income to 12.5%. This would mean a small increase for borrowers who are paying 10% a month on their loans and a decrease for those paying 15%. What we aren’t certain about is whether this will affect all borrowers or just ones that qualify for the income-based repayment plans.
The change in monthly payments will he cuts the repayment period from 20 to 15 years, freeing borrowers of their burden 5 years earlier. Again, he has not made it clear whether this would only be for those in the income-based repayment plans, and whether it would include both federal and private loans. A part of the confusion with this is due to his proposal that would privatize the student loan program.
Privatize The Student Loan System
Trump has been a big advocate of privatizing industry’s that can be performed better without the government. He’s therefore proposed that student loan lending is handed back to private lenders as it was prior to 2010. Private lenders were originating most of the federally backed student loans which were known Federal Family Education Loans. President Obama changed this by having all federal student loans originate through the government’s Direct Loan program. Since then, private lenders have been issuing private student loans without federal backing. In 2017 it’s expected that less than 10% of new student debt will be private.
Those in favor of his proposal believe that a market-driven approach would create more efficiencies, lower costs and be better positioned to determine a student’s ability to repay a loan. Opponents point to the higher interest rates and less flexible repayment options of private loans which may negatively impact student borrowers.
Student Earnings Potential To Determine Loan Worthiness
One of the major aspects of Trump’s proposed plan is for colleges to assume a larger portion of the risk associated with student default rates. Colleges and lenders would work together to determine the loan worthiness of a student. They would determine this by taking into account the student's major, choice of college and the job prospects resulting from both. Those with majors in fields with higher employment and higher pay would be approved for a higher level of debt than those with less potential.
Colleges would then be brought in and would assume some responsibility for the outcomes by sharing the student loan risk with the lender or the government. The colleges that didn’t participate in this would then be denied federal financial aid. What isn’t clear is whether the risk sharing would include all colleges or what thresholds and penalties would apply to colleges of different types and sizes.
Cut College Costs
Trump is also planning on having colleges take more responsibility for lowering their costs which would alleviate some of the stress placed on student borrowers. He has proposed doing this by taxing colleges that don’t cut their expenses past a certain threshold. This would force colleges to be accountable for how they spend their endowments, requiring they spend a certain portion on lowering tuition and other costs placed on students.
One of the reasons colleges have such high costs is their administrative burdens due to having to comply with federal regulations. Trump is pushing towards deregulation which would challenge the scope and power of the Consumer Financial Protection Bureau which was set in place to protect students from predatory lending practices.
Extending Federal Financial Aid to Nontraditional Education Programs
Trump is also wanting to see that all forms of higher education including, community college and vocational and technical schools, are easier to access and pay for by students who prefer them over traditional four-year colleges.
With his inauguration looming, everyone is anxious to see what comes of his first 100 days. One thing is certain, change is definitely coming.