Trump Administration’s Proposals for Student Loan Repayment Plans

March 3, 2018
By: Mason Gallik

The Trump Administration’s budget proposal calls for significant changes to federal student loan programs. While some of the specifics are vague on details, this proposal gives a glimpse into potential future efforts. The most significant proposal is probably reforming income-driven repayment plans for student loan borrowers. These changes call for streamlining of the income-driven repayment plans into one plan and the elimination of Public Service Loan Forgiveness.

The proposal calls for creating one income-driven repayment plan. This plan would require payments of 12.5% of discretionary income for either 15 or 30 years to receive loan forgiveness (discretionary income is your income minus 150% of the poverty line). For borrowers with undergraduate federal loans, forgiveness will occur after 15 years of payments. Revised Pay As You Earn (REPAYE) is probably the most similar existing program to the new proposal for comparison purposes. Currently, REPAYE requires payments of 10% of discretionary income for 20 years. This new program requires higher monthly payments to be paid over a shorter time period for borrowers with only undergraduate debt. Depending on your individual situation, the proposal may save you money when compared to REPAYE.

For students with graduate federal loans, forgiveness will occur after making payments of 12.5% of discretionary income for 30 years. To compare, REPAYE requires borrowers with graduate loans to make payments of 10% of discretionary income for 25 years before loan forgiveness occurs. The new proposal calls for both higher payments and longer payment periods. This will most likely require the majority of borrowers with graduate loans to pay more than under REPAYE.

The proposal also calls for the complete elimination of Public Service Loan Forgiveness (PSLF). PSLF has been relatively controversial because some believe that borrowers are taking advantage of the program by taking out large amounts of loans for expensive graduate programs. Remember that PSLF is the only program where loan forgiveness is not taxed so borrowers in this program can save a lot of money as it currently exists. Others argue that PSLF is needed so that low paying public positions will be filled. For example, a newly minted lawyer could become a law clerk and have her payments tied to income instead of going to a law firm to be able to afford higher monthly payments through just her salary.

These proposals tend to be more focused on eliminating some of the potential deficits in the student loan portfolio from loan forgiveness for graduate loan borrowers. This comes at the expense of the borrowers in some cases. However, other changes like shortening loan forgiveness to 15 years for borrowers with undergraduate loans has the potential to benefit those borrowers. A more detailed article with hypothetical examples of the effects of the new programs will be coming out soon.