As the world still continues to readjust from a 21st Century “Dewey Defeats Truman” moment, President’-elect Donald Trump is quickly beginning his transition from private citizen to sitting in the Oval Office. One of the key issues Mr. Trump will need to address is the cost of higher education and a total outstanding student loan debt of $1.4 trillion. As more than 40 million Americans, or 12% of the national population, are currently making student loan payments and millions more will be in the near future, many American families are waiting to hear how he will reform higher education.
On Mr. Trump’s campaign website, most of the education talking points are focused on reforming K-12 education, although, two bullet points do discuss higher education. The first bullet point mentions that President-elect Trump will work with Congress to help colleges and universities receive federal tax breaks and tax dollars to reduce the cost of college and student debt. Mr. Trump also wants to make it easier to attend and afford a two or four-year college or to attend a technical school.
Reforming Federal Student Loans
One of the ways Mr. Trump plans on making college more affordable is by reforming the repayment options for federal loans. One benefit of the various federal loans is that graduates that earn lower salaries have the opportunity to enroll in income-based repayment plans. The U.S. Department of Education currently offers several different repayment plans that cap monthly payments at 10% of the borrower’s adjusted income and forgive any remaining balance after 20 or 25 years, with the exception of the Public Sector Loan Forgiveness Program that forgives federal loans after 10 years of repayment.
Mr. Trump plans to streamline the income-based repayment process by offering a single repayment plan that caps monthly payments at 12.5% of one’s adjusted income and the remaining balance will be forgiven after 15 years, instead of 20 or 25 years.
Trump’s student loan plan means higher monthly payments, but, a potentially larger balance will be repaid as the loans are forgiven 5 to 10 years sooner than under current forgiveness programs. For example, if a borrower can save approximately $12,000 (or more) by paying $312 per month for 15 years instead of $250 monthly for 20 years.
One obvious downside to this plan is that cost of higher education is transferred from the student to the taxpayer. This means Trump’s student loan plan has the potential to increase the federal deficit more than the current 20 & 25-year repayment plans. To help counter the additional expenses, Trump has proposed reducing funding to the Department of Education and urging colleges to reduce costs and passing those savings onto the current students.
Why Federal Student Loan Reform is Important
Donald Trump didn’t make student loan reform a key plank of his 2016 Presidential campaign, but, it is an important issue. Student loan debt, currently at $1.3 trillion, is the second highest form of consumer debt only trailing home mortgage loans. The average 2016 college graduate recently entered repayment status with $37,000 in student loans which translates into a monthly payment of approximately $400 for ten years.
The overwhelming majority of current student loans issued are federal student loans. Of all the federal borrowers, enrollment in income-based repayment plans has leaped from 5 percent in 2012 to 20 percent in 2016. The Department of Education currently forgives approximately $11 billion in federal student loans annually. As many undergraduates remain in school to earn a graduate degree or professional training, instead of entering the workforce, enrollment in federal loan forgiveness plans will continue to increase in the near future.
So far there hasn’t been any statistics released for how much more Mr. Trump’s forgiveness plan if enacted, will cost compared to current loan forgiveness programs. But, there isn’t much information available regarding the forgiveness projections for the current 10-year Public Student Loan Forgiveness and existing 20 and 25-year loan forgiveness programs that have all experienced enrollment booms since the 2012 Presidential election.
Government Profits from Student Loans
Another higher education topic that Mr. Trump will need to address is his belief that it was “unfair” that the federal government earns a profit from the federal student loan programs. Judging from these comments, one could assume that Trump wants to reduce the interest rates on federal loans to only reflect the interest rate charged to the Department of Education to borrow the money and any administrative costs.
According to the Congressional Budget Office, the Department of Education to earn an estimated profit of $135 billion over 10 years. But, the CBO also predicts that the Department of Education will also spend approximately $88 billion of that profit over the same 10-year period to cover administrative costs like loan default and delinquency. While an estimated profit of $47 billion over a decade is still very good, and one of the few areas the federal government actually helps reduce the national deficit, there are some questions to consider regarding Trump’s viewpoint on this topic.
Do the federal student loan program and its estimated profits increase the cost of student loan payments? Would lower interest rates cause tuition prices to increase, decrease, or remain the same as a college education would be more affordable for current and future college students receiving federal student loans?
One possible solution that Trump talked about on the campaign trail was partially privatizing the student loan industry as it had been before the Great Recession. This would be an easy way reduce the number of federal student loan originations and theoretically reduce the number of applicants that could enroll in a loan forgiveness program as private student loans do not qualify for these programs.
It might not be until after his inauguration that Mr. Trump has addressed the future of federal student loan interest rates and how current rates will impact his higher education agenda. The Trump administration might also have to define what is an acceptable profit from the federal student loan programs to offset the current approximate default rate of 10% and to help pay for his proposal to shorten the current forgiveness programs to 15 years.
Student Loan Disbursements Based on Student’s Major
Another idea that has been floated by the Trump team has been to tie federal student loans to a student’s field of study. This means degrees that typically prepare students for careers with low levels of pay will receive less aid than in-demand degrees such as engineering, science, and mathematics. An approach like this could also help limit the number of students that graduate with $100,000+ in student loans and receive job offers that might only start in the upper $20,000s or lower $30,000s. This group of students and graduates are one reason the enrollment in income-based repayment plans has increased so dramatically within the past four years.
Just as Donald Trump has promised to change the status quo in Washington, his higher education platform so far indicates small tidbits of change if it is enacted. The two signature policy pieces at the moment appear to be streamlining the income-based repayment plans to 15 years, although the future of the 10-year Public Service Student Loan Forgiveness program is still undetermined, and his attempt to reduce the footprint of the Department of Education in originating future student loans. He will also need to address how he can help limit the sharply rising costs of tuition that keep making each new graduating class the most indebted Millennials to enter the workforce year after year.
Author: Jeff Gitlen
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