Donald Trump’s student loan repayment plan could provide real benefit to you if (a) he makes good on his promise, and (b) you have the right kind of student loan repayment plan.

One big benefit would be that you could save a lot of money and your loan would be forgiven sooner. One potential downside is that your payments would be higher.

Before we look at Trump’s proposed plan, you need to understand some potentially confusing terminology. Trump’s proposed plan would be a new type of Income-Driven Repayment Plan (IDR). Under current guidelines there are four different IDRs, each with slightly different terms and qualifications. They are: Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).

Here’s how federal student loan repayment could change under a Trump administration. 

Trump’s Student Loan Repayment Plan

As currently understood, Trump’s plan would most closely resemble the REPAYE Plan. Keeping in mind that none of this is law yet, here is what Trump proposes:

  • You would consolidate all of your current federal student loans (private loans are not eligible) into a single plan. 
  • When payments start, you would pay 12.5% of your discretionary income toward your loans. (The current REPAYE plan requires10%.)
  • Your loan would be totally forgiven after 15 years. (Current loans cannot be forgiven for 20 or 25 years, depending on whether loans are for undergraduate or graduate study.)

For more information on current student loans and loan forgiveness, visit the U.S. Department of Education website

Questions Remain

Trump has not yet explained specifically how the increased forgiveness amounts and resulting higher costs to taxpayers would be funded.

He has said he plans to lower federal spending accordingly. Trump has also promised to scale back funding significantly for the Department of Education.

The Department of Education currently spends about $11 billion on IBR plans annually. It is not known how much more the government would have to spend on a plan that forgives loans 5 to 10 years earlier than current regulations allow.

It’s also important to note that debt canceled by a student loan repayment plan is taxed as income. 

Congressional Action Not Required

Now that he's president, Trump can enact his plan through the Department of Education without congressional approval. In fact, President Obama created two repayment plans through the Department of Education during his tenure.

According to Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, “This [student loan repayment plan] could be implemented entirely through the regulatory process.” 

Steps You Can Take Now 

As you await more direction from the incoming administration, there are things you could do to prepare.

  • Do your best to stay out of default. In the past, new student loan programs have been difficult for those in default to enroll in, which might make enrolling in a new Trump plan problematic.
  • Make sure that all of your federal loans are consolidated in the direct loan program. If they are not, take action to do so.
  • If you are in default, you may want to enroll in an Income-Driven Repayment plan. (See more on IDR plans here.) Doing so will likely lower your payments. You will also be well positioned to take advantage of Trump’s student loan repayment plan should it come to pass.
  • If you are current on your payments, it may be advisable to stay put in your current loan(s) until the Trump plan is formally revealed. If your income is low enough and your balance high enough, the Trump plan may save you money, especially if forgiveness occurs after 15 years.
  • If you have private loans, they will likely not be eligible for Trump’s plan as it now stands. That could change, however, so it would be wise to watch for forthcoming announcements from the Trump administration.
  • If you have Stafford loans, check to see if you qualify for any of the Stafford forgiveness programs. 

Tweaking the Plan

Some observers like the idea of repaying federal student loans based on income, but feel adjustments are needed.

For one thing, they say, there should be a disincentive to pile on additional debt. Currently, with payments based solely on a percentage of income, your payments would be the same no matter how much student loan debt you carry.

One solution would be to require those with a higher balance to pay back their student debt at a higher percentage of income.

Others say it would be best if all federal student loans fall under an IDR plan. That way someone with higher income would not be able to obtain a standard plan at a lower rate as is allowed currently. 

The Bottom Line

An Income-Driven Repayment plan such as the one Trump may enact could be good news for you, depending on your income and the balance owed on your student loans. If your balance is high enough and your income low enough, you could end up with much of your debt forgiven after 15 years.

On the other hand, if your income is high and your balance relatively low, you may pay off your debt in fewer than 15 years and have nothing left to forgive. 

Once a Trump plan is in place, if you have a choice, it will be important to run the numbers before deciding which plan is best for you.

For more information. (See Debt Forgiveness: Escape Your Student Loans and Student Loans: Federal Loan Consolidation.)

 

 

 

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