They're way too old for the Tooth Fairy, but nearly half of all college students believe that their student loans will be forgiven by the federal government. What are the actual chances that a student's loans will be at least partially forgiven?
A study by LendEDU, a company that matches families with student loans, asked 500 college students 16 questions. It found that 49.8% believe that they’ll be helped by federal student loan forgiveness programs.
Another issue that arose from the survey: A large percentage of college students don’t understand the basics of student loans. Along with the 80% who don’t know the federal student loan interest rates they’ll pay, 64% believe that once they graduate, they can refinance their student loans with the federal government. Actually, the only way to refinance these loans is through the private sector – and that comes with a loss of many of the benefits that are tied to federal student loans.(See our tutorial: All About Student Loans and Student Loan Forgiveness: How Does It Work?)
Don’t Write This Off
The idea of having student loans forgiven isn’t as far-fetched as you might think. Donald Trump made some campaign promises that would drastically change the student loan landscape if he keeps those promises as president. See Trump's Student Loan Repayment Program: Could It Help You?)
Some plans currently exist. Under an income-driven repayment plan, the borrower must pay 10% to 15% of his or her income for 20 years on undergraduate loans or 25 years for graduate loans. Under one of Trump’s reforms, borrowers would make monthly payments capped at 12.5% of their income for 15 years. (Whether there are different time periods for graduates and undergraduates is unknown.)
Next, Trump proposed that more private sector lenders would be involved in student loans. Under the current program, students pay between 3.76% and 6.31% in interest, but prior to 2016, many students got locked into rates of 6.8% and higher without the ability to refinance the interest rate. Trump claimed that the government is making too much money off student loan interest and that private lenders could make rates more competitive. Would the perks that come with federal student loans – forgiveness after a certain amount of time, certain tax advantages and more, now be permitted with private loans? Nobody knows.
Trump has also been critical of colleges and universities raising tuition at an alarming rate. In the 1971–72 school year, tuition and fees at a four-year private, nonprofit university were $1,832 in today’s dollars. Today, the average cost is $31,231 – much higher than the normal rate of inflation. Further, public and private universities expanded their payrolls by 28% between 2000 and 2012 – 50% faster than during the previous decade.
Trump has targeted universities with large endowments, saying that they need to help lower the cost of tuition, but it’s likely that he’ll target all colleges and universities, calling on them to find ways to bring costs under control.
Expect to Pay Back Your Loans
Currently, there are forgiveness programs in place, such as the programs mentioned above, and there’s a forgiveness program for qualified public service workers that wipes out their entire federal balance after 10 years of payments. However, only a small number of people qualify. (Read: Debt Forgiveness: Escape Your Student Loans and Student Loan Forgiveness: What You Need to Know.)
Experts believe that the government hurdles to overcome in expanding the forgiveness program would be substantial. There are at least two big questions: How would it be paid for? And how would it sit with Republicans who believe that the government is already too generous with student loan help?
The Bottom Line
Taking out student loans with the idea that you won’t have to pay them back is a bad idea. There’s little doubt that you’ll make monthly payments for at least 15 years, and whether you’ll get any more relief than that is largely up in the air.
A study conducted by Student Loan Hero found that only about 20% of respondents believe that President Trump will have a positive impact on student loans. Don’t bank on things changing: If you’re in a repayment period, keep making those on-time payments. Another thing to look for when you graduate: An employer with student-loan repayment benefits. There actually are some.