If you're one of the millions of people with a student loan, you know it can get a little crazy trying to keep up with all the changes in the industry, not to mention all the promises from national leaders. From presidential candidates who promise student loan forgiveness—and free college—to those who want to strip away some of the perks of being a student loan borrower. In fact, the Trump administration has proposed a slew of bold moves designed to shake up the industry and weaken the power of regulators.
Under Secretary Betsy DeVos, the U.S. Department of Education loosened the restrictions on for-profit colleges—which have higher-than-average default rates—and also tried to limit the ability of states to regulate federal loans. The department even worked to side-step oversight of federal loans by the Consumer Financial Protection Bureau (CFPB), a move that helped force the resignation of CFPB student loan ombudsman Seth Frotman in August 2018. GOP lawmakers also successfully enacted more concrete changes. Among them is a tax bill that ended the tuition deduction for students who itemize their tax returns. Though it's important to note that the bill did uphold the American Opportunity Tax Credit.
The fate of several other potential changes is still up in the air. The following are a few of the proposals that borrowers could see in the near future.
- Under the Trump administration, student loan income-based repayment options would be narrowed down into one.
- Loan forgiveness would be eliminated.
- All subsidized loans would be eliminated.
- The lifetime borrowing limits for Parent and Graduate PLUS programs would be capped, curbing the burden for certain borrowers.
Fewer Loan Repayment Options
Students traditionally had eight different repayment options for federal loans, which make up the lion’s share of the market. They could make fixed payments over the life of the loan, incrementally increase their payments with a graduated plan, or choose an income-driven option.
The Trump administration wants to narrow the number of income-based repayment plans to just one—a move it claims will make the decision-making process less complicated for borrowers. The proposal would limit monthly payments to 12.5% of discretionary income and forgive undergraduate debt after 15 years or 30 years for graduate student debt. Undergraduate loans generally aren’t forgiven for 20 to 25 years, depending on the repayment option a borrower selects.
Elimination of Loan Forgiveness
For some grads, working for the government or a nonprofit after college is a way to do some good for society—even if it means taking a substantial pay cut to do so. The Public Student Loan Forgiveness (PSLF) program, introduced by George W. Bush in 2007, made that decision a little easier. PSLF eliminates the balance on your student loan if you work in either of these sectors once you’ve made 120 monthly payments on schedule. The program has been great for the relatively small number of borrowers who qualify, but it’s expensive for the federal government.
Congress passed a spending bill that directed $350 million toward the loan forgiveness program in 2018. But President Trump has tried to eliminate the PSLF program altogether but has been unsuccessful. Although the cut would disqualify any newer loans, older loans would be apparently be grandfathered.
An End to Loan Subsidies
The Higher Education Act of 1965 essentially shapes the post-secondary education system in the United States. But it hasn’t been renewed for a long time. A group of GOP congressmen wanted to replace this bill with the Promoting Real Opportunity, Success, and Prosperity through Education Act (PROSPER). If it passed, the bill would have had implications for both students and borrowers. But since the Democrats took control over the House of Representatives in the 2018 election, the act was all but stalled.
The Trump administration proposed getting rid of all subsidized student loans. These loans give borrowers a lot of relief, with the government covering accrued interest while students attend classes. These loans are given to people who show they have a financial need when they fill out the Free Application for Federal Student Aid (FAFSA).
All loans would, therefore, become unsubsidized. This means each and every borrower would owe interest on loans while students are still in college rather than being able to wait until to repay them after they graduate. Shifting subsidized loans to unsubsidized ones would, therefore, put a huge burden on a big part of the nation's student body. In fact, roughly 5.7 million subsidized loans were advanced during the 2016 to 2017 school year.
If subsidized loans are eliminated, borrowers would be responsible for interest payments even as students attend classes.
Under the Trump administration's budget, there are proposals to curb the lifetime limits on how much borrowers can take out under Parent PLUS and Graduate Plus loans. Parent PLUS loans allow parents and even grandparents to provide financial funding for the education of their kids or grandchildren, while the other category is meant for those who are pursuing graduate studies.
This potential change isn't necessarily a bad thing. Loans under the Parent PLUS program can cost a lot because interest rates are relatively high. If parents are saving or near retirement, this can put a big burden on them. Although limited to how much they can take out, borrowers can still apply to refinance student loans to try to get a lower interest rate.
The Bottom Line
Student loan debt has reached record levels in the United States—especially as the cost of higher education continues to rise. For many borrowers, there has been a respite in the form of loan forgiveness, subsidies, and repayment options. But this may not be a reality for very long with proposals in place to change the student loan industry.