Here’s what Donald Trump has in store for your student loans
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If it still hasn’t sunk in yet, Donald Trump is now officially the new President of the United States.As he finishes his first week in the Oval Office, Americans -- everyone from his most ardent supporters to his staunchest critics -- wait to see if the business magnate turned commander-in-chief will succeed in converting his campaign bluster into actionable change.How will he maintain relations with Russia? Will Trump do something about ISIS? Is he really going to build a wall to block out Mexico? Can he mend fences with his domestic opponents? And will Obamacare actually be repealed?College students and graduates have another big worry on their minds with the new administration in place: What will President Trump do about the $1.4 trillion student loan debt crisis?Current student loan borrowers are none too optimistic about the future of student loans under the Trump presidency. One recent survey found that 40 percent of borrowers feel that Trump’s influence will range from somewhat to very negative on their student loans. An additional 41 percent didn’t believe that there’d be any positive effect on the industry with Trump at the helm. A mere 19 percent expressed any optimism for student loans in the next four years.
Trump was moderately vague about his ideas on student loan reform on the campaign trail. From what we know now, Trump’s plan will see all current and future borrowers signed up for federal income-based repayment plans pay more in loan repayments up front, but with the chance to have their student loans forgiven sooner than currently allowed.
Current federal government-backed, income-driven repayment plans call for borrowers to pay about 10 percent of their annual discretionary income towards their student loans.One of President Trump’s proposals looks to modify income-based repayment plans, and closely resembles that of REPAYE (Revised Pay As You Earn), one of four payment deals offered by the federal government. Trump’s plan would involve increasing the mandated payment amount from 10 percent to 12.5 percent of a federal loan borrower’s yearly income, a 2.5-percent increase that will make your monthly student loan payments higher -- and that’s not taking interest rates into account.
Despite Trump’s proposal to raise income-driven payment minimums, student loan borrowers will have the opportunity to have their loan balances forgiven after 15 years of consistent repayment.Current standards under REPAYE forgive student loan debt after 20 to 25 years.
Despite the crippling debt that student loans can cause (the average Class of 2016 graduate has more than $37,000 in existing loans), income-driven repayment plans are, on the whole, one way to prevent borrowers from overextending themselves (or not paying at all) while ensuring that the government gets back the money they’ve loaned.So who does the Trump business model truly benefit: the student or the government? Will seeing your contribution requirement raised 2.5 percent but shaving a decade off loan forgiveness timeline pose a difference to your finances?The rationale is that by prompting borrowers to pay more, they’ll get rid of their student loan debt sooner -- and if you’re still paying them after 15 years, your loans are forgiven regardless of your remaining balance.A recent analysis from NerdWallet revealed two things about the Trump student loan plan:
With the contribution increase, lower-earning individuals will pay less overall on their student loans, even when their loan balances are equal to those of higher-earning borrowers
Borrowers on income-driven repayment plans will also have their loans dismissed more quickly
These theories would make sense, since the income-driven repayment system is meant to benefit lower-earning borrowers the most, those who may struggle to pay down their debt. On a regular repayment schedule, they have less financial leverage than borrowers with better incomes to pay down their debt early and keep up the pace with their interest rates.The analysis looked at three borrowers, each one earning $20,000, $30,000 and $40,000, all with $30,100 in total student loan debt with a 4.1 percent interest rate. Under the 12.5-percent income-driven Trump plan, the $20,000 earner will pay just $8 more a month, while the person with double the income ($40,000) will shell out $43 more monthly, on average.The study further examined the loan forgiveness aspect, calculating that the borrower earning $20,000 would have their loans forgiven with the current income-driven plan or Trump’s proposal. If they borrowed $24,000 at the same 4.1-percent APR, they’d pay $14,166 under REPAYE, with $35,041 forgiven after two decades.Under the Trump loan forgiveness program, the borrower would repay $12,046 after 15 years, after which $29,543 would be forgiven. Compare the difference, and you’d incur a savings of nearly $5,500 with the early forgiveness program, even with the contribution increase.
Trump’s ambitious plan extends into the private lending arena, as well. He’s hinted at cutting out U.S. government involvement entirely and privatizing the entire student loan industry, one area that already comes with fewer forgiveness options and a more strict, credit-driven approval process.If it was to go completely private, we might see student borrowers with little or no credit getting rejected for a student loan the same way they might for a credit card or mortgage loan -- or, getting approved with interest rates that all but guarantee a future descent into debt.What’s the solution until then? More than 16 percent of student loan borrowers are in default. And while we have a few suggestions on how the debt-laden student lending industry can heal itself, until that happens you have a few options:
Paying off your student loan interest while you’re still attending college can give you the head start you need when it comes time to graduate and begin paying down your loan principal
If you have an IRA, you may be able to withdraw distributions tax free for qualified education expenses
These tips can help you negotiate for reduced tuition before you borrow a dime in student loans
Refinancing for lower interest rates can make your loan repayments more affordable in the long run
Consolidation allows you to combine several student loans into one single loan with one reduced interest rate, alleviating the need to keep track of several loans with the different terms and APRs
Undergrads, on average, borrow $12,000 more in student loans than they really need; by budgeting and determining your costs to attend college, you’ll know how much you need in loans without borrowing too much and being stuck with a principal and interest you don’t need
Above all, avoid fleeing the country to escape your student loan debt obligations. Given Trump’s aggressive stance on immigration, you may never be allowed back into the country -- and no amount of student loan debt is worth taking that risk.
Image: Gage Skidmore
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